imf country report no. 16/224 the bahamas · imf country report no. 16/224 the bahamas ... arrivals...
TRANSCRIPT
© 2016 International Monetary Fund
IMF Country Report No. 16/224
THE BAHAMAS 2016 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE BAHAMAS
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions
with members, usually every year. In the context of the 2016 Article IV consultation with
The Bahamas, the following documents have been released and are included in this
package:
A Press Release summarizing the views of the Executive Board as expressed during its
June 8, 2016 consideration of the staff report that concluded the Article IV
consultation with The Bahamas.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s
consideration on June 8, 2016, following discussions that ended on March 23, 2016,
with the officials of The Bahamas on economic developments and policies. Based on
information available at the time of these discussions, the staff report was completed
on May 16, 2016.
An Informational Annex prepared by the IMF staff.
A Staff Statement updating information on recent developments.
A Statement by the Executive Director for The Bahamas.
The IMF’s transparency policy allows for the deletion of market-sensitive information and
premature disclosure of the authorities’ policy intentions in published staff reports and
other documents.
Copies of this report are available to the public from
International Monetary Fund Publication Services
PO Box 92780 Washington, D.C. 20090
Telephone: (202) 623-7430 Fax: (202) 623-7201
E-mail: [email protected] Web: http://www.imf.org
Price: $18.00 per printed copy
International Monetary Fund
Washington, D.C.
July 2016
Press Release No. 16/274
FOR IMMEDIATE RELEASE
June 10, 2016
IMF Executive Board Concludes 2016 Article IV Consultation with The Bahamas
On June 8, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the
Article IV consultation1 with The Bahamas.
Economic growth is estimated to have stalled in 2015, as a modest increase in air tourism
arrivals was not sufficient to offset a contraction in domestic demand and weak exports of
goods. Private consumption and investment were weighed down by headwinds from fiscal
consolidation, as well as an end to construction and uncertainty over the opening of the Baha
Mar megaresort. Inflation was moderate at 1.9 percent on average in 2015, despite a temporary
increase owing to Value Added Tax (VAT) introduction in January 2015. Unemployment, after
a brief dip earlier in the year, rose to 14.8 percent in November, as workers hired for the planned
Baha Mar opening were later dismissed. Double-digit unemployment and the elevated share of
nonperforming loans continue to constrain private credit (which fell by 1 percent year-on-year in
December 2015).
Smooth VAT introduction has contributed to fiscal consolidation. VAT revenue over the first 12
months, at $536 million (about 6 percent of GDP), has exceeded expectations. As a result, the
FY2014/15 (ending in June 2015) deficit is estimated to have declined to 4.4 percent of GDP
(down from revised 5.6 percent in FY2013/14). Available data for the first seven months of
FY2015/16 suggest a further decline in the deficit, by about 1 percentage point, compared to the
same period a year ago. The central government debt-to-GDP-ratio nevertheless reached 66.5
percent in December 2015, pointing to limited fiscal space. The current account deficit declined
significantly, to 15.3 percent of GDP in 2015 (compared to 22 percent a year earlier), driven
primarily by lower imports owing to the decline in oil prices and halt to Baha Mar construction.
International reserves, supported in part by government external borrowing, increased to $981
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually
every year. A staff team visits the country, collects economic and financial information, and discusses with officials
the country's economic developments and policies. On return to headquarters, the staff prepares a report, which
forms the basis for discussion by the Executive Board.
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
2
million at end–March 2016, equivalent to about 2.4 months of next years’ projected imports of
goods and services.
Prospects are tempered by Baha Mar related uncertainties and low potential growth. Growth is
expected to strengthen to about 0.5 percent this year, supported by continued growth in air tourist
arrivals and moderating headwinds to private consumption and investment. Looking forward,
while Baha Mar opening is expected to provide a temporary boost to growth, helping to close the
still sizeable output gap, structural impediments continue to constrain potential growth. Staff
estimates point to potential growth between 1 and 1.5 percent over the medium term, down from
close to 3 percent at the start of the century. This outlook is subject to mainly downside risks,
calling for continued fiscal consolidation to rebuild fiscal and external policy buffers and
boosting investor confidence, as well as a decisive shift towards implementation of structural
reforms to improve competitiveness, reduce unemployment and raise potential growth.
Executive Board Assessment2
Executive Directors noted that economic activity stalled in 2015, weighed down by weak
domestic demand and goods exports. The current account deficit declined significantly but
remains sizable. Going forward, the outlook remains challenging, especially with high youth
unemployment and low productivity growth. Against this backdrop, Directors emphasized the
importance of continued fiscal consolidation to rebuild fiscal and external buffers and structural
reforms to improve competitiveness, reduce unemployment and raise potential growth. They also
underscored the need to address financial sector challenges.
Directors commended the authorities for a successful VAT introduction which has contributed to
fiscal consolidation. They encouraged the authorities to resist pressures to introduce exemptions
and to ensure continued strong implementation. Directors called for continued consolidation to
reduce the public debt to GDP ratio and ensure sustainability. On expenditures, Directors
emphasized the need to contain increases in the public wage bill and to orient the budget towards
growth-enhancing infrastructure spending. As regards fiscal reforms, Directors advocated
moving towards a fully-fledged central revenue agency, improvements in tax administration, and
a review of the efficiency of tax exemptions and concessions, including to the tourism sector.
They supported the on-going reforms to modernize the public financial management system and
called for extending state owned enterprise reform beyond the energy sector. Directors also
emphasized the need for timely pension system reforms.
To address impediments to growth, Directors called for decisive implementation of structural
reforms, including in the context of the National Development Plan. These reforms should aim at
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of
Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers
used in Summings Up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
3
strengthening the business environment, raising human capital, reducing skill mismatches, and
lowering high labor and energy costs. Directors also highlighted potential gains from efficient
investment in information and communication technology, transportation, public utilities,
economic diversification, and enhanced resilience to natural disasters.
Directors welcomed recent progress in financial sector reforms, including in addressing gaps in
the AML/CFT regulation and implementation of the new Basel II/III regime. They encouraged
the authorities to enhance their crisis management framework. Directors called for greater
emphasis on risk-based financial sector supervision and regulation, given global “de-risking”
trends, and strong efforts to ensure compliance and close communication across stakeholders.
Directors called for renewed efforts to resolve the overhang of non-performing loans to spur
credit growth.
4
The Bahamas: Selected Social and Economic Indicators
Est. Proj. Proj.
2012 2013 2014 2015 2016 2017
(Annual percentage changes, unless otherwise indicated)
Real sector
Real GDP 3.1 0.0 -0.5 -1.7 0.5 1.0
Nominal GDP 6.5 1.5 1.1 2.7 2.0 3.1
Consumer price index (annual average) 1.9 0.4 1.2 1.9 0.9 1.2
Consumer price index (end of period) 0.7 1.0 0.2 2.0 0.9 1.2
Unemployment rate (in percent) 14.4 15.8 14.6 13.4 15.6 14.9
Saving rate (percent of GDP) 10.9 10.1 9.2 12.0 14.0 14.3
Investment rate (percent of GDP) 28.8 27.7 31.2 27.2 25.4 25.0
Financial sector
Credit to the nonfinancial public sector 14.9 23.6 4.0 7.7 5.3 6.3
Credit to the private sector -0.3 -1.2 -2.8 -1.1 0.3 0.6
Liabilities to the private sector -0.1 0.2 1.2 -0.3 1.7 3.8
External sector
Exports of goods and services 10.5 -1.3 -1.4 -9.5 6.4 5.8
Of which: Travel receipts (gross) 7.9 -1.2 1.0 3.0 7.6 4.5
Imports of goods and services 15.6 -2.6 5.0 -17.7 -3.8 3.5
(In percent of GDP, unless otherwise indicated)
Central government 1/
Revenue and grants 17.8 16.0 16.9 19.5 20.8 21.9
Expenditure 23.3 22.4 22.5 23.9 23.8 24.6
Overall balance 2/ -5.5 -6.4 -5.6 -4.4 -3.0 -2.7
Primary balance -3.2 -4.1 -3.1 -1.7 -0.1 0.2
Central government debt 48.0 55.4 60.2 64.4 65.9 67.0
External sector
Current account balance -17.9 -17.5 -22.0 -15.3 -11.4 -10.7
Change in net international reserves
(Increase -) 0.9 0.8 -0.5 -0.3 -0.4 -0.1
External public debt (end of period) 17.4 19.0 23.2 23.2 23.2 22.9
Memorandum items:
Gross international reserves
(End of period; millions of U.S. dollars) 810 742 788 812 850 859
In months of next year's G&S imports 2.0 1.8 2.3 2.4 2.5 2.4
In percent of reserve money 90 86 80 83 85 83
GDP (in millions of Bahamian dollars) 8,399 8,522 8,618 8,854 9,035 9,319
Sources: Central Bank of The Bahamas; Department of Statistics; Ministry of Finance; UNDP Human Development Report; and
Fund staff projections.
1/ The data refer to fiscal years ending on June 30.
2/ Reflects reclassification of capital transfers and net lending, about 1 percent of GDP, to some public entities to current transfers.
THE BAHAMAS
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION
Context. Economic activity has stalled and near-term prospects are tempered by
uncertainty over opening of the Baha Mar resort. Smooth implementation of the new
VAT regime has contributed to fiscal consolidation, while lower energy prices and the
winding down of Baha Mar’s construction have helped narrow the still sizeable current
account deficit. Nevertheless, fiscal and external vulnerabilities persist and mounting
structural impediments constrain potential growth.
Key policy advice
Safeguarding fiscal and external stability. Continued fiscal consolidation is critical
for rebuilding fiscal and external policy buffers and boosting investor confidence.
Priorities include resolute implementation of the current VAT regime with few
exemptions, stronger efforts to rationalize spending, far-reaching state-owned
enterprise reform and structural reforms to enhance competitiveness.
Policies towards more jobs and stronger growth. A decisive shift towards
implementation of structural policies is needed to improve competitiveness, reduce
high structural and youth unemployment and to raise potential growth. Key priorities
include strengthening the business environment, raising human capital and reducing
skill mismatches, and reducing costs. Growth-friendly fiscal reforms, including
investing in growth-enhancing infrastructure, in the context of a credible medium-
term budgetary framework would allow fiscal policy to better balance the need for
continued consolidation and support for the recovery.
Addressing financial sector challenges. Renewed efforts to spur credit growth by
cleaning up bank balance sheets, along with advancing other financial sector
reforms, can further enhance growth and help preserve financial stability. Emerging
challenges from global “de-risking” trends call for further emphasis on risk-based
financial sector supervision and regulation, strong implementation and efforts to
ensure compliance with the AML/CFT framework and close communication across
stakeholders.
May 16, 2016
THE BAHAMAS
2 INTERNATIONAL MONETARY FUND
CONTENTS
RECENT DEVELOPMENTS, OUTLOOK, AND RISKS ________________________________________________ 4
A. Recent Developments ____________________________________________________________________________ 4
B. Macroeconomic Outlook and Risks _______________________________________________________________ 5
POLICY DISCUSSIONS _____________________________________________________________________________ 10
A. Policies Towards Stronger Growth _______________________________________________________________ 10
B. Ensuring Fiscal and External Sustainability _______________________________________________________ 12
C. Addressing Financial Sector Challenges __________________________________________________________ 15
D. Other ____________________________________________________________________________________________ 19
STAFF APPRAISAL _________________________________________________________________________________ 19
BOXES
1. VAT Impact________________________________________________________________________________________ 7
2. Potential Growth __________________________________________________________________________________ 8
3. Financial Sector Regulation and Supervision: Update ____________________________________________ 17
4. Loss of CBRs _____________________________________________________________________________________ 18
FIGURES
1. Growth, Inflation, and Labor Market _____________________________________________________________ 21
2. Fiscal Developments _____________________________________________________________________________ 22
3. External and Structural Competitiveness _________________________________________________________ 23
4. Monetary and Financial Developments ___________________________________________________________ 24
TABLES
1. Selected Social and Economic Indicators _________________________________________________________ 25
2. Operations of the Central Government___________________________________________________________ 26
3. Outstanding Stock of Public Debt ________________________________________________________________ 28
4. Balance of Payments _____________________________________________________________________________ 29
Approved By
Charles Enoch
(WHD) and Rupa
Duttagupta (SPR)
Discussions took place in Nassau and Freeport during March 10-23, 2016.
The team comprised J. Turunen (Head), J. Okwuokei, S. Cerovic (all WHD)
and J. Poulain (FIN). S. Lando (LEG), M. Lutz, C. Li, E. Moreno, and H. Canales
(all WHD) provided assistance at headquarters. R. Young (OED) participated
in the concluding meetings. The mission met with Prime Minister and
Minister of Finance, Central Bank Governor, Minister of Tourism, Minister of
State for Finance, and other senior government officials, and representatives
of the private sector and civil society.
THE BAHAMAS
INTERNATIONAL MONETARY FUND 3
5. Summary Accounts of the Central Bank and the Financial System _______________________________ 30
6. Risk Assessment Matrix __________________________________________________________________________ 31
ANNEXES
I. Debt Sustainability Analysis _______________________________________________________________________ 33
II. The Public Pension System—A Case for Reform__________________________________________________ 42
III. External Sector Assessment ______________________________________________________________________ 46
THE BAHAMAS
4 INTERNATIONAL MONETARY FUND
RECENT DEVELOPMENTS, OUTLOOK, AND RISKS
A. Recent Developments
1. Economic activity stalled. Preliminary estimates suggest that real GDP contracted by
1.7 percent in 2015, as a modest increase in air tourism arrivals (see Figure 1) was not sufficient to
offset a contraction in domestic demand and weak goods exports. Private consumption and
investment were weighed down by headwinds from fiscal consolidation, as well as an end to
construction and uncertainties over the opening of the Baha Mar megaresort. Growth in 2014 was
revised down to -0.5 percent, from 1 percent
in the preliminary release, thus pointing to
two consecutive years of falling real GDP.
After repeated construction delays and legal
wrangling, the main creditor (China Export-
Import Bank) has taken control of the close to
complete Baha Mar. Inflation was moderate at
1.9 percent on average in 2015, despite a
temporary increase owing to Value Added Tax
(VAT) introduction in January 2015 (see Box 1).
Unemployment, after a brief dip earlier in the
year, rose to 14.8 percent in November, as
workers hired for the planned Baha Mar
opening were later dismissed.
2. VAT introduction contributing to fiscal consolidation. Reports suggest relatively smooth
implementation and an efficient VAT regime. While there are some concerns about the accuracy of
the registration database, registration, filing and compliance rates appear to have been broadly
comparable to regional standards. VAT revenue over the first 12 months, at $536 million (about
6 percent of GDP), has exceeded expectations (Figure 2). As a result, the FY2014/15 (ending in June
2015) deficit is estimated to have declined to 4.4 percent of GDP (down from revised 5.6 percent in
FY2013/14). Data for the first seven months of FY2015/16 point to a further decline in the deficit, by
about 1 percentage point, compared to the same
period a year ago. The central government debt-
to-GDP-ratio nevertheless reached close to
66.5 percent in December 2015, pointing to
limited fiscal space. State-owned enterprises
(SOEs) continue to be a significant fiscal drag, with
annual transfers from the budget amounting to
about 1.4 percent of GDP in 2014/15. Damage
from the October Hurricane Joaquin is estimated
at $100 million (about 1.1 percent of GDP).
0
10
20
30
40
50
60
70
80
90
Comparative VAT C-Efficiency Ratios 1/
(In percent)
Source: Fund Staff calculations.
1/ Country averages, various years. 2015 for The Bahamas
0
5
10
15
20
25
30
35
-6
-4
-2
0
2
4
6
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Growth and Unemployment
(In percent)
Real GDP Growth Unemployment (RHS)
Youth unemployment
Sources: Department of Statistics; and Fund staff estimates.
THE BAHAMAS
INTERNATIONAL MONETARY FUND 5
3. Narrower, but still sizeable, current account deficit. The current account deficit declined
significantly, to 15.3 percent of GDP in 2015 (compared to 22 percent a year earlier), driven primarily
by lower imports owing to the decline in oil prices and halt to Baha Mar construction (Figure 3).
International reserves, supported in part by
government external borrowing, increased to $981
million at end–March 2016, equivalent to about 2.9
months of next years’ projected imports of goods
and services. Reflecting a sizeable US dollar
appreciation, the real effective exchange rate (REER)
appreciated by 12 percent in 2015, thus weakening
cost competitiveness of goods exporters. The impact
on tourism competitiveness is mitigated somewhat
by the large share of US tourists in total arrivals.
4. Further contraction in private sector credit. Double-digit unemployment, as well as tight
bank lending conditions continue to constrain private credit (which fell by 1 percent year-on-year in
December 2015) (Figure 4). The share of nonperforming loans (NPLs), mostly mortgages, remains
elevated (at 15.2 percent of total loans in February 2016), while provisioning has been increasing.
Despite stalling economic activity, available prudential indicators continue to point to a well-
capitalized, liquid and profitable domestic banking system as a whole. However, the financial
position of one state-owned bank, which represents around nine percent of domestic banking
system assets, remains challenged with accumulated losses that continue to erode its capital base.
B. Macroeconomic Outlook and Risks
5. Prospects tempered by Baha Mar related uncertainties and low potential growth. Real GDP is
expected to stabilize, with positive growth of about ½ percent this year, supported by continued
growth in air tourist arrivals and moderating headwinds to private consumption and investment.
Looking forward, staff projections assume that Baha Mar opening provides a boost to growth in
2018 and 2019, helping to close the still sizeable output gap. Structural impediments continue to
constrain potential growth. Staff estimates point to potential growth between 1 and 1½ percent
80
85
90
95
100
105
110
115
120
125
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
Jan-1
1
Jan-1
2
Jan-1
3
Jan-1
4
Jan-1
5
REER REER Tourism based
REER(Index 2010=100)
Sources: INS, and Fund staff calculations.
2008 2009 2010 2011 2012 2013 2014 2015
Capital/risk-weighted assets 2/ 23.5 26.1 25.5 25.5 26.1 31.7 31.2 30.9
Excess liquid assets 3/ 28.2 53.2 46.1 48.1 49.9 53.5 53.0 55.8
Liquid assets/deposits 25.1 30.0 36.1 38.3 41.0 45.5 49.7 54.9
NPLs/total loans 6.1 9.3 11.9 12.7 13.8 15.3 15.3 14.2
Provisions/NPLs 46.0 37.1 36.6 36.6 42.7 39.0 51.2 58.5
Operating cost/average assets 3.0 2.9 3.1 3.2 3.2 3.7 4.9 3.5
Net income/average assets 3.1 2.3 2.4 2.4 1.5 1.4 -1.2 1.6
Sources: Central Bank of The Bahamas; and Fund staff calculations.
1/ For 2015, latest available data.
2/ Central Bank target is 17 percent.
3/ In percent of statutory minimum requirement.
Financial Soundness Indicators 1/
(Domestic commercial banks)
THE BAHAMAS
6 INTERNATIONAL MONETARY FUND
over the medium term, down from close to 3 percent at the start of the century (see Box 2). The still
negative output gap and remaining slack in the labor market suggest that domestic inflationary
pressures are likely to remain muted over the next few years. VAT revenue is expected to support
further fiscal consolidation and help stabilize central government debt over the medium-term, albeit
at a higher level (at about 67 percent) than previously expected. Although the current account
deficit is expected to narrow further, supported by low oil prices and an expected boost to tourism
receipts, it remains elevated (at about 7 percent of GDP) over the medium term. Absent further
foreign borrowing, international reserves are therefore likely to increase only gradually.
6. Outlook subject to mainly downside risks. Setbacks in fiscal consolidation and a
worsening of the macroeconomic outlook owing to a slowdown in advanced economies could
heighten risks to macroeconomic stability and the country’s credit rating. Continued “de-risking”
trends, including loss of correspondent banking relations (CBRs), could create an uncertain
environment for businesses and have adverse implications for the financial services sector. Other key
risks include a longer-than-expected delay in Baha Mar’s opening, U.S. dollar appreciation leading to
a further weakening of cost competitiveness, natural disasters, and, over the medium term, the
potential emergence of Cuba as a competitor for U.S. based tourists (see Table 6). On the upside,
the Baha Mar creditor (through its appointed receivers) has an opportunity to promptly complete
and open the resort.
7. Past Fund advice. The last Article IV consultation was completed in June, 2015. The
Executive Board called for (i) structural reforms to strengthen competitiveness, raise potential
growth and lower unemployment; (ii) continued efforts to strengthen the fiscal position; (iii) efforts
to further strengthen financial sector regulation and supervision; and (iv) policies that will address
high NPLs. The authorities’ policies have been broadly in line with this advice, although
implementation has been gradual. The authorities are moving ahead with finalizing the National
Development Plan and have taken steps towards energy sector reform (para 11). Fiscal consolidation
continues, although at a more gradual pace than previously envisaged (paras 9 and 13). Authorities
continue to advance financial sector reforms (para 17 and box 3). Progress in addressing NPLs has
been slow (para 12).
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Real GDP (in percent) 0.6 3.1 0.0 -0.5 -1.7 0.5 1.0 2.2 2.1 1.5 1.3
Inflation (average, in percent) 3.1 1.9 0.4 1.2 1.9 0.9 1.2 1.7 1.8 1.7 1.5
Overall fiscal balance 1/ -4.7 -5.5 -6.4 -5.6 -4.4 -3.0 -2.7 -2.2 -1.9 -1.5 -1.0
Central government debt 1/ 45.0 48.0 55.4 60.2 64.4 65.9 67.0 66.8 66.0 65.3 64.4
External current account balance -15.1 -17.9 -17.5 -22.0 -15.3 -11.4 -10.7 -8.9 -7.6 -7.4 -7.0
Gross international reserves (in US$ millions) 885 810 742 788 812 850 859 909 923 958 981
In months of next year's goods & services imports 2.2 2.0 1.8 2.3 2.4 2.5 2.4 2.4 2.4 2.4 2.4
Sources: Central Bank of The Bahamas; Department of Statistics; Ministry of Finance; and Fund staff projections.
1/ Central government only; Fiscal year data (to June).
Staff Projections
Medium-Term Macroeconomic Framework
(In percent of GDP, unless otherwise indicated)
THE BAHAMAS
INTERNATIONAL MONETARY FUND 7
Box 1. VAT Impact
Consistent with international evidence of incomplete pass-through of tax increases to prices, VAT
introduction in January 2015 likely had only a temporary and muted impact on consumer inflation,
further dampened by still weak consumer demand and the concurrent decline in international oil prices.
Reform. As part of the VAT reform, the authorities have eliminated the 10 percent hotel room tax,
reduced import tariffs on a number of items, as well as adjusted several domestic tax rates including
rates on property taxes, business licenses, and stamp duties. Overall, estimates suggest a significant
net increase in tax revenue.
Temporary, muted increase in headline inflation. While the tax reform has made an important
contribution to maintaining macroeconomic stability and strengthening policy credibility, it is also
expected to have temporarily increased inflation and, even with low estimated fiscal multipliers, to
have dampened near-term economic activity. The VAT was introduced at a time when consumer
demand was already relatively depressed, with a high unemployment rate and a large negative output
gap, and coincided with a large decline in global oil prices. Both factors are likely to have dampened
the impact of VAT introduction on prices. Estimates based on a simple forecasting model for inflation
suggest that after controlling for other inflation determinants, VAT introduction increased annual CPI
inflation in 2015 by about 2 percentage points, reflecting less than complete pass-through.1/ The
impact on inflation was also likely dampened by the simultaneous reduction in several import duties
and excises.
Impact on inflation sub-components. Monthly data on the retail price index and its subcomponents
(relative to the average inflation in previous years) shows a temporary spike in headline inflation in
January 2015. Headline and median inflation increased by about 2½ to 3½ percentage points in
January. Pass-through appears to have been immediate and near-complete for sub-components such
as food, beverages, furnishings and household equipment, health, communication and recreation
(accounting for about 26 percent of the consumption goods included in the retail price index). Pass-
through has been incomplete for other subcomponents, including the largest subcomponent of
housing, utilities and energy (more than 30 percent of the total), as well education, restaurants and
hotels and miscellaneous services. For some
components, such as the tourism related
restaurants and hotels, this reflects
compensating factors in the tax reform, such as
the reduction on the hotel room tax. For others,
such as transportation, lower energy prices are
likely to have dampened the impact on prices.
The remaining differences in pass-through
across items could reflect differences in price
elasticities of consumption, competition, and the
impact of regulated and administered prices.
There is little evidence of “inflation smoothing”,
i.e. increases in inflation in the months prior to
actual VAT introduction, in headline inflation.2/
________________________________________________
1/ The inflation forecast is based on a parsimonious model that relates headline inflation to the change in government debt and
US inflation. VAT impact is approximated by the part that is not explained by underlying fundamentals.
2/ These results are broadly consistent with international evidence. For example, Benedek et al. (2015) show using European data
that only about one third of VAT increases are directly passed through to consumer prices, with most of the increase taking
place contemporaneously. Benedek, D, De Mooij, R, Keen, M. and Wingender, P. (2015): “Estimating VAT Pass-Through”, IMF
working paper WP/15/214.
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Sep-14 Dec-14 Mar-15 Jun-15
Impact on Inflation
(In percent)
Headline Min Max Median
Note: Annualized monthly inflation relative to average monthly inflation in previous years.
Min and Max refer to lowest and highest monthly inflation among available subcomponents.
THE BAHAMAS
8 INTERNATIONAL MONETARY FUND
Box 2. Potential Growth
Staff analysis points to a significant decline in potential growth over the last 15 years. Furthermore, the
large negative output gap is not expected to be closed before 2019. A comparison with other tourism
intensive countries in the region generally shows similar trends.
Methods. Potential growth and the output gap are not observable variables and estimates are subject
to significant uncertainty. We therefore use three different approaches to estimate them. First, we use
the multivariate filter approach developed by Blagrave et al. (2015).1/ The structure of the filter relates
the output gap to changes in inflation (i.e. the Philips curve) and slack in the labor market. This
pragmatic approach can be easily applied to many countries, as it only requires data on three
observable variables: real GDP, inflation and
unemployment. Second, we estimate potential output
using a conventional Cobb-Douglas production
function approach with constant returns of scale. This
approach also allows us to determine the different
drivers of potential growth, i.e. factor accumulation
(labor and capital) and total factor productivity (TFP)
growth.2/ Finally, we benchmark our results against a
simple univariate filter. Each of the three approaches
have pros and cons. For example, while both the
multivariate filter and production function approaches
are based on economic theory, they also rely on
several simplifying assumptions. In contrast, the
univariate filter has no economic theory content, but is simple and widely used.
Lower potential growth and a still sizeable output gap. Although there are differences in
magnitudes, all three methods suggest that potential growth has declined significantly over the last 15
years. The decline started already in the late 1990’s, with potential growth hitting a low point in the
immediate aftermath of the global financial crisis (GFC).
Since then, potential growth has recovered modestly,
with current estimates suggesting potential growth
around ½ percent. Going forward, staff projections
suggest a further recovery to about 1 to 1½ percent
over the medium term. The results across all three
methods also show a sizable negative output gap that
has yet to be closed. Actual real GDP contracted by
more than 6 percent in cumulative terms in 2008 and
2009, and as a result, the output gap turned sharply
negative. Estimates suggest that the output gap is still
negative, with an average of -2.5 percent across the
three methods, and is not expected to close before
2019.
________________________________________________
1/ See P. Blagrave, R. Garcia-Saltos, D. Laxton and F. Zhang (2015): “A Simple Multivariate Filter for Estimating Potential
Output”, IMF Working Paper WP/15/79.
2/ We assume a labor share of 60 percent. The capital stock series is constructed using the perpetual inventory
technique, assuming a depreciation rate of 6 percent (as in N. Thacker, S. Acevedo and R. Perrelli (2012): “Caribbean
Growth in an International Perspective: The Role of Tourism and Size”, IMF Working Paper WP/12/235).
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2000 2002 2004 2006 2008 2010 2012 2014 2016
MV filter
Production function
HP filter
Average
Potential Growth
(In percent)
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
2000 2002 2004 2006 2008 2010 2012 2014 2016
MV filter
Production function
HP filter
Average
Output Gap
(In percent)
THE BAHAMAS
INTERNATIONAL MONETARY FUND 9
Box 2. Potential Growth (Concluded)
Decline in potential growth driven mostly by TFP. All factor inputs have contributed to the decline
in potential growth. However, the deterioration in growth prospects has been driven mostly by more
negative TFP growth, which has been about -1 percent of GDP on average since 2000. These results are
similar to those obtained by Thacker et al. (2012),
who also find that negative TFP growth has been a
persistent feature in The Bahamas since the early
1980s.3/ Furthermore, the large positive
contribution of capital has been declining over
time, despite temporary effects of large
investment projects (for example, Baha Mar
related investments boosted the capital
contribution between 2011 and 2014). The
contribution of labor also declined in the early
2000s, but has been improving modestly since
then, in spite of considerable slack in the labor
market.
Cross country comparisons. Applying the same
approaches to Barbados and Jamaica suggests that
potential growth has declined also in these
countries. However, the pre-crisis decline in
potential growth started earlier and was larger in
The Bahamas. Over the last few years, estimates
suggest that potential growth has been recovering
somewhat faster in Jamaica. All three countries are
also still struggling to close the output gap, amid
both relatively low actual and potential growth.
________________________________________________
3/ TFP is measured as a residual. Thus, any measurement errors, changes in the quality of the capital and labor, as well as
changes in capital utilization are attributed to TFP growth.
-2
-1
0
1
2
3
4
5
2000 2002 2004 2006 2008 2010 2012 2014 2016
TFP growth
Capital Contribution
Labor Contribution
Potential growth
Drivers of Potential Growth
(In percent)
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2000 2002 2004 2006 2008 2010 2012 2014 2016
Bahamas Barbados Jamaica
Potential Growth
Source: Fund staff estimates.
THE BAHAMAS
10 INTERNATIONAL MONETARY FUND
POLICY DISCUSSIONS
A. Policies Towards Stronger Growth
8. Macroeconomic policies geared towards stability. The nature of The Bahamas as a small,
open island economy with a strong commitment to a fixed exchange regime and an extensive
capital flow management (CFM) system, as well as limited policy buffers, leaves the authorities with
few macroeconomic policy tools. In this context, monetary policy is constrained by the eventual
increase in U.S. interest rates and fiscal policy needs to be geared primarily towards ensuring debt
sustainability. Against this background, continued fiscal policy tightening centered on reducing
current expenditure, while protecting necessary social spending, would be the main policy lever to
respond to external shocks.
9. Fiscal consolidation in the low growth environment. The VAT reform has made an
important contribution to maintaining macroeconomic stability and strengthening policy credibility.
Authorities expect that strong VAT collection, together with reforms to enhance revenue
administration raising additional revenue of up to 2½ percent of GDP, will contribute to significant
consolidation in the near-term. However, with weaker than expected growth weighing on revenue
collection, the authorities’ plan that seeks to reduce the FY2015/16 fiscal deficit to 1.5 percent of
GDP and to achieve a near balanced budget by 2017/18 appears too optimistic. Staff projections
suggest a still significant, but more realistic
and growth friendly pace of consolidation,
with the fiscal deficit projected to narrow to
3 percent, in FY2015/16. The fiscal deficit is
expected to decline further in FY2016/17,
albeit at a slower pace, with debt stabilizing at
around the same time. Credible reforms to
ensure fiscal responsibility, including decisive
steps towards a medium-term budget
framework (para 15), would allow fiscal policy
to better balance the need for continued
consolidation and support for the recovery in
the near-term.
10. Investing in growth-enhancing infrastructure. To support near-term economic activity,
staff sees room for shifting spending away from current spending and towards more productive and
growth-friendly infrastructure spending. Priorities include efficient investment in information and
communication technology, transportation, public utilities, as well as projects that support economic
diversification, increase domestic value added in the dominant tourism sector and enhance
resilience to natural disasters. Using responsible public-private partnerships, where relevant, can
help reduce the burden of higher investment on government finances.
-8
-6
-4
-2
0
2
4
6
8
2005/0
6
2006/0
7
2007/0
8
2008/0
9
2009/1
0
2010/1
1
2011/1
2
2012/1
3
2013/1
4
2014/1
5
2015/1
6
2016/1
7
Output gap Primary fiscal impulse
Fiscal Impulse and Output Gap 1/
(In percent)
O
Sources: Central Bank of the Bahamas and Fund staff estimates.
1/ Primary fiscal impulse is the change in the cyclically adjusted primary balance
THE BAHAMAS
INTERNATIONAL MONETARY FUND 11
11. Structural reforms to lift potential, reduce unemployment, and enhance
competitiveness. Staff estimates that negative TFP growth and smaller contributions from both
capital accumulation and labor have contributed to a significant decline in potential growth since
2000 (see Box 2). Moreover, the non-accelerating rate of unemployment has been consistently
increasing over the same time period (see Figure 1). Alternative indicators of competitiveness point
to persistent weaknesses, such as elevated energy costs and high costs of doing business. The
authorities have completed a comprehensive State of the Nation diagnostic that identifies a broad
strategy for structural reforms, a first step towards completing their National Development Plan
(NDP). The next steps, expected to be completed later this year, include further national dialogue
and development of a comprehensive package of specific reform measures. Many structural
measures, such as fundamental state-owned enterprise (SOE) reforms, will take time to bear fruit.
Staff therefore argued for an urgent shift towards implementation of growth-friendly structural
reforms, focusing on the following main priorities:
Strengthening the business environment. Reforms
to improve the ease of doing business should
focus on strengthening contract enforcement
and frameworks for resolving insolvencies and
registering property, improving access to credit,
and alleviating the administrative burden and
time necessary to start a business.
Raising human capital and reducing skill
mismatches. Enterprise surveys suggest that the
main business obstacle cited by firms is an
inadequately educated workforce. Policies
should aim at improving productivity through
better educational outcomes, further
strengthening existing apprenticeship and
vocational training programs, easing restrictions
on labor mobility and seeking to reverse the
“brain drain” of skilled Bahamians.
Improving competitiveness through reducing costs. Policies should aim at reducing energy and
other utility costs and better aligning wages with productivity. Staff urged the authorities to
advance state-owned enterprise (SOE) reforms, including reducing the entities’ operational
inefficiencies, fostering an enabling regulatory environment and aligning tariffs with costs of
service delivery. Regular financial reporting and consistent monitoring are also essential to
ensuring accountability. Staff welcomed recent steps towards energy sector reform. An external
management company is coming on board and parliament has passed legislation for reforming
the loss-making Bahamas Electricity Company, establishing an independent regulator, and
refinancing legacy debts and fund capital improvements. Staff argued that reforms should be
extended to other SOEs, including Bahamasair and the Water and Sewerage Corporation.
0
10
20
30
40
50
60
70
80
90
100
Pa
yin
g T
axe
s
En
forc
ing
Co
ntr
ac
ts
Res
olv
ing
In
solv
en
cy
Ob
tain
ing
Co
nst
ruct
ion
Pe
rmit
s
Tra
din
g A
cro
ss B
ord
ers
Pro
tect
ing
Min
ori
ty I
nve
sto
rs
Ge
ttin
g E
lect
rici
ty
Sta
rtin
g a
Bu
sin
ess
Ge
ttin
g C
red
it
Reg
iste
rin
g P
rop
ert
y
2016 Caribbean range 2010
2016 2010 Caribbean range
Doing Business Indicators
(Index, from 0 to 100, where 0: lowest and 100: best)
Source: The World Bank
THE BAHAMAS
12 INTERNATIONAL MONETARY FUND
12. Policies to revive credit growth. Staff noted that discussions between the government
and banks about placing distressed mortgage assets in special purpose vehicles (SPVs) have been
protracted, owing in part to social concerns. Resolving debt overhang in a timely and socially
responsible manner would help unlock resources for private sector financing, thereby supporting
growth and further strengthening financial stability. In this context, the authorities should consider
implementing a comprehensive framework for resolution that may include, inter alia, the
establishment of a specialized agency. Work on establishing a credit bureau, which could eventually
improve well-grounded access to credit, continues. Prompt finalization of this work is key, given that
more time will be required to build comprehensive information regarding existing debt obligations
and repayment histories.
Authorities’ views
Authorities affirmed that they remain on track to achieve their deficit target in FY2015/16,
pointing to tighter spending control and seasonality in the collection of business license fees
and property taxes. Authorities expect to reallocate spending items to accommodate costs
related to Hurricane Joaquin, with reconstruction spanning several years. They argued that room
for increasing capital spending in the near term was constrained by project execution capacity.
Authorities expect to achieve further reduction of the deficit to below 1 percent next year mainly
through modernization of revenue administration, stronger enforcement efforts and spending
control.
Authorities were optimistic that new investment projects coming on stream in the near term have
the potential to boost growth and lower unemployment. Authorities nevertheless fully agree
with the need to design and implement an ambitious growth strategy, acknowledging that weak
competitiveness, low productivity and high costs of doing business are hampering growth. They
see the NDP as a critical device to strengthen and diversify the economy. Finally, the authorities
recognized the need for a decisive and timely resolution of NPLs. They noted that banks have
been more aggressive recently in restructuring and other forms of mortgage relief and customer
assistance programs. The authorities admitted that progress has been slow, but that they
continue to work closely with banks on a new framework for resolution.
B. Ensuring Fiscal and External Sustainability
13. Rebuilding fiscal policy buffers. The pace of fiscal consolidation has been more gradual
than previously envisaged owing to both weaker than expected growth and recent revisions in the
fiscal accounts. Looking forward, and despite the more gradual pace of consolidation, the primary
fiscal balance is expected to return to a surplus over the next two years. As a result, the central
government debt to GDP ratio is expected to stabilize at 67 percent of GDP by FY2016/17 and begin
to decline gradually thereafter (Annex I: Debt Sustainability Analysis). Fiscal vulnerabilities extend
beyond the central government. SOE’s debt amounted to an additional 17.4 percent of GDP in
December 2015 and the unfunded pension liabilities of the public pension system, already sizeable
at $2.2 billion (about 26.2 percent of GDP), are projected to grow further in the next decades (Annex
II: Pension Reform).
THE BAHAMAS
INTERNATIONAL MONETARY FUND 13
14. Following smooth VAT introduction, focus on other fiscal reforms. Further initiatives
include a review of all revenue lines, and modernization of customs, property tax, vehicle fees, and
immigration fee administration. The authorities recently stepped up revenue administration reform
by introducing online payment of business license fees, electronic filing of customs import
declaration, and merging the operations of key domestic revenue agencies as a step towards
establishing a Central Revenue Agency (CRA). The government is also taking steps to introduce a
National Health Insurance (NHI) scheme to be rolled out in phases, with public consultation still
under way and with the cost and sources of funding yet to be determined. The authorities released a
consultation paper on fiscal responsibility legislation in May 2015, which has yet to be discussed.
15. Combination of growth-friendly reforms to help fiscal consolidation.
Revenue reforms. Staff called for standing firm against pressures to weaken the VAT’s efficiency
through introducing exemptions to items such as food, medical and insurance services, which
could amount to an estimated ¾ percent of GDP in revenue losses. Social concerns should
instead be addressed by targeted adjustments to the safety net. In addition, the authorities
should comprehensively review other tax exemptions and concessions, including to the tourism
sector, and consider eliminating low revenue yielding fees and duties, and further simplifying
domestic taxes (such as the business license fee regime) that are not business–friendly. While
VAT introduction has increased tax utilization capacity, there is substantial room to raise more
revenue through non-distortionary consumption taxes to compensate for revenue losses
elsewhere. Staff welcomes recent progress in improving revenue administration. Efforts should
focus on moving further towards a fully–fledged CRA with well-defined institutional framework
and governance structure empowered to administer most domestic taxes, thereby reducing
costs, and improving efficiency and compliance. Further steps to ensure continued success in
VAT implementation include more focus on program development, planning and performance
monitoring based on operational data and establishing an audit program.
Expenditure reforms. Fiscal consolidation has so far focused on the revenue side, while
government expenditure has been drifting upwards after the GFC. Staff reiterated that
rationalization of current expenditure in the context of a medium–term budget framework (see
below) would help preserve the hard-won benefits of the VAT, enhance policy credibility in the
low growth environment and strengthen fiscal sustainability. Such a framework should seek to
contain further growth in current spending and gradually unwinding crisis related spending
increases. The authorities should resist pressure to
increase public wages and employment, especially
in view of low labor productivity growth, while also
strengthening payroll management. Furthermore,
enhancing the efficiency of spending on goods and
services and transfers and subsidies would generate
fiscal savings. Staff urged the authorities to advance
SOE reforms to reduce their drain on the budget.
Finally, the authorities should begin to take
0
2
4
6
8
Wages and
salaries
Goods and
services
Subsidies and
transfers
Capital
expenditure
Pre-crisis average Post-crisis average
Composition of Primary Spending(In percent of GDP, 7 year average)
Sources: Central Bank of the Bahamas and Fund staff estimates.
THE BAHAMAS
14 INTERNATIONAL MONETARY FUND
measures to address risks from the pension system, through parametric reforms and over the
medium-term, through the introduction of a sustainable defined contribution system.
Medium term budget framework and public financial management (PFM) reforms.
Weaknesses in the PFM environment, such as out-of-date accounting system and Chart of
Accounts, undermine the integrity of financial reporting and spending quality. Capital budgeting
is not fully integrated into the annual budget planning process. Staff emphasized that improving
fiscal reporting, introducing procedural rules to
support expenditure discipline and preparing a
medium-term fiscal framework document,
submitted to the parliament, are important
immediate steps towards adopting a fiscal rule. To
strengthen their commitment to fiscal
responsibility, the authorities should consider
further intermediate steps towards a fully-fledged
framework, such as introducing a simple rule to
contain volatility in spending growth.
16. Structural reforms and fiscal consolidation to address competitiveness challenges. The
authorities remain firmly committed to the exchange rate peg (US$1=B$1), which provides an
important anchor. They are moving only gradually to reform the CFM system with recent efforts
focused on easing personal business transactions and loosening limits on cross-border investments.
Staff projections reflect an improvement in the current account over the medium term to around
7 percent of GDP, allowing for modest rebuilding of external buffers. Despite significant
uncertainties, the external sector assessment points to an external position that is weaker than
suggested by fundamentals and desirable policy settings (Annex III: External Assessment). Other
indicators, such as relatively high energy costs and indicators of the business environment show The
Bahamas falling further behind its peers, and the declining share of tourism among Caribbean
countries that focus on a relatively expensive,
higher-end tourism experience point to persistent
structural weaknesses. Reserves appear broadly
adequate according to standard metrics, but fall
short when taking into account small island
specific factors, such as exposure to external
shocks and natural disasters. To maintain
sustainability of the external position and improve
external competitiveness, staff continues to call for
structural reform (para 11) and further fiscal
consolidation (paras 13, 14, and 15).
Authorities’ Views
Authorities are committed to further fiscal consolidation to maintain macroeconomic stability
and policy credibility. To mitigate the potential impact of the VAT on low-income earners, the
60
70
80
90
100
110
120
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Share of Top 5* A Week at the Beach Index Tourist Receipts
Tourism Receipts : Share among the Caribbean
Tourism Receipts : Share among the Caribbean excluding DR&JAM
Bahamas Tourism Index(2005 = 100)
* Countries are Bahamas, KNA, Jamaica, St. Lucia, Grenada
-10
-5
0
5
10
15
FY00/0
1
FY01/0
2
FY02/0
3
FY03/0
4
FY04/0
5
FY05/0
6
FY06/0
7
FY07/0
8
FY08/0
9
FY09/1
0
FY10/1
1
FY11/1
2
FY12/1
3
FY13/1
4
FY14/1
5
Real Primary Spending Growth(In percent)
Sources: Central Bank of the Bahamas; and Fund staff
estimates.
THE BAHAMAS
INTERNATIONAL MONETARY FUND 15
authorities have already raised the minimum wage and increased social spending. They continue
to review social assistance benefits, and would prefer to increase them further instead of
introducing exemptions that would reduce revenues and compromise the integrity of the VAT
regime. Authorities are optimistic that disciplined implementation of reforms to enhance
revenue administration will raise significant additional revenue. The authorities recognize the
benefits of a comprehensive review of concessions, including those to the tourism sector.
Authorities noted that efforts to introduce a medium term framework are moving in the right
direction. They are taking steps to modernize their public financial management system and
remain committed to gradually moving towards a more robust medium-term fiscal framework.
They continue to revamp the accounting systems and to advance other budget reforms. They
are open, in principle, to adopting a fiscal rule to restrain expenditure growth, but argue that
they first need to create the right administrative conditions to ensure fiscal discipline. While
acknowledging that SOEs remain a drain on the budget, authorities expect that ongoing
initiatives to increase efficiencies and recent investments will reduce government subsidies. The
authorities are committed to rolling out NHI, but are mindful of the need to avoid causing
economic disruptions. They consider pension reform, including moving to a defined contribution
based regime, an important objective and acknowledge the need to commence public
consultation soon.
Authorities agreed that comprehensive structural reforms and fiscal consolidation would help
enhance competitiveness and build external buffers. The authorities pointed out that the current
level of international reserves remain within target levels and argued that an expected
improvement in tourism earnings and foreign direct investment, together with structural
reforms, will facilitate stable and organic accumulation of reserves.
C. Addressing Financial Sector Challenges
17. Building on recent progress. Staff welcomes recent progress in financial sector reforms
which address some of the priorities identified in the 2013 FSAP, including further strengthening of
the regulatory and supervisory framework, reporting under the U.S. Foreign Accounts Tax
Compliance Act (FATCA), and implementation of the new Basel II/III regime (see Box 3).
Nevertheless, pockets of financial sector vulnerabilities remain. Authorities are encouraged to move
expeditiously in strengthening their framework for crisis management and bank resolution. Despite
active support in the past, further efforts are needed to put in place and implement a
comprehensive plan to address financial difficulties and governance of one state owned bank.
18. Additional scrutiny from global “de-risking” trends. The financial system has been
exposed to global “de-risking” trends as reflected in, thus far temporary, interruptions of
correspondent banking relations (CBRs) in some institutions (see Box 4: Loss of CBRs). While loss of
CBRs has not led to significant disruptions thus far, continued measures could have an adverse
impact on the financial sector and the economy as a whole. The financial services sector is relatively
large and sophisticated, reflecting the country’s status as an offshore financial center, and accounts
THE BAHAMAS
16 INTERNATIONAL MONETARY FUND
for more than 10 percent of GDP and 2.7 percent of total employment.1,2 However, global “de-
risking” trends could lead to even more scrutiny, further reducing the sector’s contribution to
growth and employment, and thus complicating efforts to diversify the economy.
19. Addressing challenges from loss of CBRs. In addition to strengthening their overall risk-
based framework for regulation and supervision, the authorities have taken several steps to address
risks from loss of CBRs. The central bank conducted in June 2015 a survey to gain a better view of
correspondent banking activities and the impact of recent measures and plans to reissue the survey
in 2016. The Caribbean Financial Action Task Force (CFATF) has recently recognized progress made
in addressing the deficiencies identified in their previous report. Following the December 2015
onsite mission, an updated report and policy recommendations will be discussed at the CFATF
plenary later this year. In advance of the evaluation, the central bank finalized amendments to its
AML/CFT Guidelines and introduced new Wire Transfer regulations. The authorities are also actively
participating in regional bodies that aim to create collective solutions to loss of CBRs. Looking
forward, increased scrutiny calls for effective implementation of AML/CFT regulations and strong
efforts to ensure compliance, as well as added emphasizes on the need to keep pace with evolving
international standards by promptly addressing any gaps. Continued evaluation of the supervisory
and regulatory framework for both banks and non-banks to proactively identify and address risks in
a timely and assertive manner is critical.
Authorities’ Views
Authorities remain committed to further improving their regulatory and supervisory system to
ensure financial stability. A state-owned bank engaged a consulting firm to develop and
1 The Bahamas: Financial Sector Stability Assessment
2 Financial Stability Report January-June 2015
2010 2011 2012 2013 2014
Financial intermediation (share of GDP) 11.5 12.0 11.0 10.9 10.3
Employment (percent of total employment) 1/
Domestic 2.4 2.4 2.3 2.3 2.1
Offshore 0.8 0.7 0.7 0.7 0.6
Government revenue from the financial sector
Percent of GDP 1.3 1.8 1.0 1.1 1.0
Percent of central government revenues 7.9 10.2 5.8 6.8 6.2
Assets (share of GDP)
Domestic banks 119 120 114 115 113
Offshore banks … 6,748 3,657 2,903 2,236
Licensed Mutal Funds 1,747 1,100 1,336 1,501 …
Sources: Central Bank of The Bahamas; and National Statistical Agency.
Selected Financial Sector Statistics, 2010-14
1/ Total employment for 2010 is average of 2009 and 2011. Figures for 2012-13 are averages of within-year survey data.
THE BAHAMAS
INTERNATIONAL MONETARY FUND 17
implement a rehabilitation plan for the bank. The plan will be directed at strengthening risk
management, enforcing collection, revising market focus and improving governance.
The authorities recognize the challenges stemming from global “de-risking” trends, and
expressed their commitment to promptly addressing them. They will continue to monitor the
industry, provide assistance to banks and encourage them to take a risk-based approach, and
work on any remaining regulatory gaps. The authorities will also continue to coordinate with
regional counterparts to mitigate any adverse economic fallout. They also pointed to the already
strong overall AML/CFT regime in place, and called for more clarity on regulatory expectations
and requirements from international banks and from source jurisdictions.
Box 3. Financial Sector Regulation and Supervision: Update
2013 FSAP. The FSAP found no short-term threats to financial stability, independent and strong
oversight, and strict firewalls between the domestic financial system and the offshore sector.
Nonetheless, the authorities continue to further improve the regulatory and supervisory system:
Risk-based supervisory framework/crisis management. The Central Bank of The Bahamas
(CBB) and other regulatory authorities continue to work towards strengthening their
frameworks. Following IMF technical assistance in 2015, CBB expects to issue a consultation
paper that proposes a hybrid, as opposed to purely judicial, approach to bank resolution.
Bank stress tests. The latest Financial Stability Report (June 2015) shows that capital adequacy
ratios (CARs) are high on average, in excess of 30 percent, and the banking system is resilient
to several shocks. For example, even under a scenario with a 200 percent increase in NPLs,
CARs remain above the 17 percent regulatory minimum, with the exception of one bank,
whose CAR was still above the trigger rate that would have mandated additional capital.
Basel II/III. Implementation commenced in 2016Q1. Most foreign-owned institutions already
observe Basel III. The first official reporting under the new framework occurred in January 2016
for commercial banks, and end-March for international firms. CBB analysis suggests that banks’
capital levels remain robust also under the new Basel II/III framework, although some
individual institutions are “likely to be stressed” by the new requirements. Assuming full
implementation of capital conservation buffer (CCB) and total eligible capital, only one bank
would fall short. With respect to CCB and countercyclical capital buffer, four banks would not
meet the additional requirement.
Credit unions. The CBB has assumed regulatory and supervisory authority for the domestic
credit union system comprising nine institutions (with assets equivalent to about 3.5 percent of
the domestic banking systems’ assets). Upon adoption, credit union deposits have Deposit
Insurance Corporation protection.
Credit Bureau. Preparatory work continues. Necessary legislation is expected to be presented
to the parliament soon with operations starting 12-16 months after legislative approval.
U.S. Foreign Accounts Tax Compliance Act (FATCA). Reporting under FATCA commenced in
September 2015.
THE BAHAMAS
18 INTERNATIONAL MONETARY FUND
Box 4. Loss of CBRs
Like other countries in the region, The Bahamas has been impacted by global “de-risking” trends that
have resulted in additional scrutiny of financial institutions and, in a few cases, to temporary
interruptions in correspondent banking relations (CBRs). All affected institutions have thus far been able
to avoid significant disruptions in their services by proactively relying on multiple service providers,
switching to alternative providers or negotiating continuation in CBRs.
Impact on financial institutions. A total of six institutions, mainly domestic commercial banks and
standalone international banks, representing about 19 percent of domestic banking system assets,
have recently lost CBRs. All of them either had additional CBRs; found replacements; or were able to
negotiate a continuation in service (including against an additional annual fee). Canadian banks and
other international banks continue to rely on their head offices and parent banks for CBRs. Money
transfer business (MTB) has also been impacted. One domestic bank closed its Western Union money
transfer franchise in summer 2015, while another MTB provider has been notified about a possible
termination of their banking relationship. Adverse impacts on bank operations have been reflected
mainly in prolonged clearance procedures and higher investment and staffing costs stemming from
additional reporting requirements and scrutiny. Business segments that have been impacted include
credit card payments, cash management services, investment services, clearing and settlement,
international wire transfers and remittance services.
Reasons for termination. While reasons for terminations of CBRs by global banks have not always
been clearly stated, they appear to be driven by stricter application of source country (mainly U.S.)
regulations, and more generally, costs related to the changing regulatory environment. The general
view is that the costs of AML compliance outweigh the profits generated by CBR services, making it
particularly difficult for smaller local institutions with fewer international transactions to maintain their
CBRs. Some terminations also appear to be driven by implementation of a risk-based approach. In
particular, consistent with experiences across the region, anecdotal evidence suggests that
international correspondent banks are uncomfortable providing services to domestic banks that do
business with either MTBs or on-line gaming operators (so called “web-shops”), which are perceived as
higher risk.1/
Replacements. Replacement CBRs have been provided by other major global banks. Canadian banks
present in the domestic market do not seem to be interested in taking over correspondent banking
business and alternative service providers, i.e. second tier U.S. based banks, were generally not seen as
credible alternatives to traditional providers.
Risks. The impact has so far been limited to those institutions that lost CBRs, with no major disruptions
in service. However, continued withdrawal of services could create an uncertain environment for
business, have adverse implications for the financial sector and negative effects on the economy as a
whole. Risks are particularly significant for international banks and MTBs, given their reliance on the
international correspondent network to maintain multicurrency payments and settlements.
MTBs. While The Bahamas does not rely on remittances as a major source of foreign currency
income, termination of services could lead to an increase in the cost or interruption in
remittance outflows to other countries in the region. Overall remittance outflows average
about 1 percent of GDP in last three years (around $100 million), a small share of incoming
remittances in recipient countries (e.g. around 2.5 percent of total in Haiti and 0.4 percent in
Jamaica).
________________________________________________
1/ In an effort to better regulate the online gaming industry, “web-shops” that fulfilled regulatory requirements were issued
conditional licenses in November 2015. The Gaming Board, under the supervision of the Ministry of Tourism, has regulatory
oversight of the gaming industry (including both casinos and “web shops”).
THE BAHAMAS
INTERNATIONAL MONETARY FUND 19
Box 4. Loss of CBRs (Concluded)
Domestic banking system. While the dominance of Canadian banks, which have not been
directly impacted thus far, is likely to play an important stabilizing role for the domestic
banking system, additional loss of CBRs could lead to market concentration. Additional costs
from maintaining CBRs are likely to be transferred to final customers, leading to higher cost of
doing business and hampering access to financial services. Moreover, withdrawal of Canadian
banks could cause major disruptions in financial flows and trade finance.
Other risks. Further loss of CBRs or higher costs could encourage businesses to move into less
regulated parts of the financial system, contributing to the growth of an informal banking
system.
D. Other
20. Data and technical assistance. While data provision remains generally adequate for
surveillance, gaps remain in both coverage and timeliness, including in national accounts, public
sector accounts, and external accounts. Progress in addressing these data shortcomings has been
slow. Staff continues to support the authorities’ efforts, including continuing assistance with VAT
implementation; adoption of International Public Sector Accounting Standards (IPSAS) on an accrual
basis; strategic and medium–term budgeting, and compiling and publishing quarterly national
accounts and IIP statistics.
STAFF APPRAISAL
21. Economic activity weighed down by weak domestic demand and challenges to
competitiveness. Real GDP growth stalled in 2015 as continued growth in air tourism arrivals was
not sufficient to offset weaker domestic demand, weighed down by headwinds from fiscal
consolidation as well as an end to construction and uncertainties over the opening of the Baha Mar
megaresort, and weaker goods exports. Looking ahead, real GDP growth is projected to increase
gradually as these headwinds moderate and to receive an additional, temporary boost when Baha
Mar opens.
22. Fiscal consolidation helped by VAT introduction and progress in other revenue
reforms. Staff commends the authorities for the successful VAT introduction, which has made an
important contribution to maintaining macroeconomic stability and strengthening policy credibility.
Authorities should continue to resist pressures to introduce exemptions to the current broad-based
and efficient VAT regime and ensure continued strong implementation. Moving further towards a
fully-fledged central revenue agency and continuing modernization of customs and property tax
administration can further strengthen revenues. The authorities should also review the efficiency of
tax exemptions and concessions, including to the tourism sector, and consider simplifying domestic
taxes that are not business-friendly.
23. Further consolidation critical for rebuilding fiscal and external policy buffers and
boosting investor confidence. In light of still rising government debt, further determined efforts
focusing on spending rationalization are needed to ensure fiscal sustainability. The authorities
THE BAHAMAS
20 INTERNATIONAL MONETARY FUND
should contain increases in the public wage bill, extend SOE reform beyond the energy sector, and
advance on-going reforms to modernize the public financial management system. A shift in
composition towards growth-enhancing infrastructure spending and further intermediate steps
towards a medium-term budget framework would allow fiscal policy to better balance the need for
continued consolidation and support for the recovery. Finally, in the context of an ageing
population, the authorities should take measures to address increasing financial burden stemming
from the pension system.
24. Mounting structural impediments call for a decisive shift towards implementation of
structural policies. Potential growth is estimated at only 1 to 1½ percent over the medium term,
total factor productivity growth is negative, and both youth and structural unemployment are too
high. To support near-term economic activity, staff sees room for shifting spending away from
current spending and towards more productive and growth-friendly infrastructure spending.
Priorities include efficient investment in information and communication technology, transportation,
public utilities, as well as projects that support economic diversification, increase domestic value
added in the dominant tourism sector and enhance resilience to natural disasters. Given that
structural reforms will take time to bear fruit, staff urges the authorities to implement reforms to
support priorities identified in the National Development Plan without delay. Reforms should aim to
strengthen the business environment, raise human capital and reduce skill mismatches, and reduce
high labor and energy costs. Given the exchange rate peg, improving competitiveness through
structural reforms would also avoid placing an excessive burden on fiscal policy and help build still
low international reserves.
25. Addressing financial sector challenges. Renewed efforts to resolve the overhang of NPLs
are needed to spur credit growth. Staff welcomes recent progress in financial sector reforms,
including addressing gaps in the AML/CFT regulation and implementation of the new Basel II/III
regime, and encourages the authorities to continue strengthening risks-based supervision and
enhancing their framework for crisis management. Challenges from global “de-risking” trends call
for greater emphasis on risk-based financial sector supervision and regulation, strong efforts to
ensure compliance and close communication across stakeholders.
26. It is proposed that the next Article IV consultation take place on the standard 12-
month cycle.
THE BAHAMAS
INTERNATIONAL MONETARY FUND 21
Figure 1. The Bahamas: Growth, Inflation, and Labor Market
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
2004 2006 2008 2010 2012 2014
BHS air arrivals
BHS GDP
US GDP
Florida GDP
Real GDP and Tourist Arrivals Growth
(percent)
Sources: The Bahamian authorities; WEO; The Federal Reserve (St. Louis); S&P; Moody's Investor Service;
and Fund staff estimates and projections.
...while VAT has contributed to a temporary rise in
inflation
Public sector wages grow above productivity...
US recovery supports tourism......but negative growth and uncertanties weigh on
ratings
...while structural unemployment remains high.
-4
-2
0
2
4
6
8
2005 2010 2015
Real Wages (Central Govt.)
Labor Productivity
Real Wages and Productivity
(percent, 3-year moving average)
Poverty is prevalent among the youth...
-2
-1
0
1
2
3
4
2012 2013 2014 2015
Others
Transport
Energy & Ult ility
Food & Bev erage
Headline
0
5
10
15
20
25
0-4 5-14 15-19 20-34 35-54 55-64 65+
Poverty by Age Group, 2013
(percent)
National Poverty Rate
-5
-4
-3
-2
-1
0
1
2
3
4
5
0
2
4
6
8
10
12
14
16
18
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Unemployment Gap, rhs
Unemployment
NAIRU
Structural Unemployment
(percent)
Moody's Outlook/1 S&P's Outlook/1
Trinidad and TobagoBaa3 n A- n
The BahamasBaa2 s BBB- n
SurinameBa3 s B+ n
BarbadosCaa1 s B n
BelizeCaa2 s B- s
JamaicaCaa2 p B s
/1 s=stable, n=negative, p=positive
Bahamas: Comparative Credit Ratings
THE BAHAMAS
22 INTERNATIONAL MONETARY FUND
Figure 2. The Bahamas: Fiscal Developments 1/
Sources: The Bahamian authorities; and Fund staff estimates and projections.
1/ Central government fiscal year ending June 30.
0
5
10
15
20
25
30
FY09/10 FY10/11 FY11/12 FY12/13 FY13/14 Est.
FY14/15
Non-tax revenue
Value Added Tax (VAT)
Other domestic taxes
Tourism taxes
Foreign trade taxes
Revenue (percent of GDP)
0
5
10
15
20
25
30
35
40
Su
rin
am
e
An
tig
ua
an
d B
arb
ud
a
Ba
ha
ma
s, T
he
Gre
na
da
St.
Kit
ts a
nd
Ne
vis
Ea
ste
rn C
ari
bb
ea
n C
urr
en
cy …
Gu
yan
a
Do
min
ica
Be
lize
St.
Vin
cen
t a
nd
th
e …
St.
Lu
cia
Tri
nid
ad
an
d T
ob
ag
o
Jam
aic
a
Ba
rba
do
s
Tax Revenues, 2015(percent of GDP)
Regional average
0
5
10
15
20
25
30
FY09/10 FY10/11 FY11/12 FY12/13 FY13/14 Est.
FY14/15
Capital expenditure
Transfer to SOEs
Subsidies and other transfers
Goods and services
Wages and salaries
Primary expenditure(percent of GDP)
-9
-6
-3
0
3
-15
-5
5
15
25
35
FY09/10 FY10/11 FY11/12 FY12/13 FY13/14 Est.
FY14/15
Primary expenditure
Total revenue
Primary balance (RHS)
Contribution to the primary balance (percent of GDP)
0
10
20
30
40
50
60
70
80
90
2
2.5
3
3.5
4
FY09/10 FY10/11 FY11/12 FY12/13 FY13/14 Est.
FY14/15
Debt and Interest Payment(percent of GDP)
Domestic debt External debt Interest payment (Left)
-8
-4
0
4
8
12
FY09/10 FY10/11 FY11/12 FY12/13 FY13/14 Est.
FY14/15
Residual
Real interest rate
Real GDP Growth
Primary Deficit
Change in Central Government Debt
Contribution to changes in central government debt(percent of GDP)
...which still remain below regional averageVAT has bolstered tax revenues...
VAT has helped reduce the primary deficit...
Both domestic and external debt continue to grow... ...driven by large post-crisis primary deficits
...but subsidies and transfers push expenditure up
THE BAHAMAS
INTERNATIONAL MONETARY FUND 23
Figure 3. The Bahamas: External and Structural Competitiveness
Source: The Bahamian authorities; and Fund staff estimates.
0
200
400
600
800
1000
0
0.5
1
1.5
2
2.5
3
2006 2010 2015
In months of next year's imports of G. and S.
Net international reserves (Millions of US$) (RHS)
Reserve to base money target
International Reserves
-150
0
150
300
450
600
750
900
-2
0
2
4
6
8
10
12
1990 1995 2000 2005 2010 2015
Percent of GDP US$ million
Direct Investment, Net
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
Gre
nad
a
Do
min
ica
Baham
as
St V
ince
nt
Barb
ados
St. L
uci
a
Jam
aic
a
Beliz
e
Unit
ed S
tate
s
Trinid
ad
Electricity Tariffs(US dollars per KWH, 2012)
1.95.6
62.0
30.3
0.30
10
20
30
40
50
60
70
80
90
Less than primaryPrimary Secondary Tertiary Others
Labor Force by Educational Attainment(2011, percent share)
-60
-40
-20
0
20
40
60
2004 2006 2008 2010 2012 2014
Other, net
Oil imports
Travel (gross)
Current Account Balance(percent of GDP)
Current account balance
80
85
90
95
100
105
110
115
120
2007 2009 2011 2013 2015
Real(Bahamas)
Nominal (Bahamas)
Effective Exchange Rate (CPI-based)
Real (U.S.)
...with financing shifting away from FDICA deficit shrinks thanks in part to lower oil prices...
...and REER appreciation poses a challengeReserves remain uncomfortably low...
Room to reduce costs, including for electricity... ...and to increase educational attainment
THE BAHAMAS
24 INTERNATIONAL MONETARY FUND
Figure 4. The Bahamas: Monetary and Financial Developments
Source: The Bahamian authorities; and Fund staff estimates.
-5
-2.5
0
2.5
5
7.5
10
-10
-5
0
5
10
15
20
2000 2004 2008 2012 2015
Real GDP growth (rhs)
Private sector credit growth
Real GDP and Credit
(percent)
0
10
20
30
40
50
60
70
2008 2012 2015
0
5
10
15
20
25Non Performing Loans (NPLs)(percent of total loan)
Over 180 days
90 - 179 days
61 - 90 days
30 - 60 daysProvisions to
NPLs (left)
0
5
10
15
20
25
30
35
-2
-1
0
1
2
3
4
5
6
2004 2008 2012 2015Q3
Banking System Capital and Earnings(percent)
Net income to assets ratio (right)
Capital to risk-weighted
assets ratio
0
2
4
6
8
10
12
14
16
18
0
1
2
3
4
5
6
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Treasury bill (90 days)
Weighted average rate deposit
Weighted average rate lending (Right)
Interest Rate(percent, 12-month change)
0
500
1000
1500
2000
2500
2000 2004 2008 2012 2015
Excess Liquid Assets
Statutory Liquid Assets
Bank Reserves (B$ millions)
Capital buffers continue to increase... ... interest rate spread supports bank profitability
... while credit growth remains negativeBank liquidity is high and increasing...
NPLs have declined, but remain elevated...
0
4
8
12
16
20
BHS BRB JAM TTO
2011
2012
2013
2014
2015
Comparative NPLs
(percent of total loan)
...Bahamas' NPLs are comparatively high
THE BAHAMAS
INTERNATIONAL MONETARY FUND 25
I. Social Indicators
GDP (US$ millions), 2014 8,618 Poverty rate (percent), 2013 12.8
GDP per capita (US$), 2014 23,926 Unemployment rate (percent), November 2015 14.8
Population (thousands), 2014 360 Infant mortality rate, 2013 10.4
Life expectancy at birth (years), 2014 75.4 Human development index (rank), 2014 55
Adult literacy rate, 15 & up (percent), 2007 95.6
II. Economic Indicators
Est. Proj. Proj.
2012 2013 2014 2015 2016 2017
(Annual percentage changes, unless otherwise indicated)
Real sector
Real GDP 3.1 0.0 -0.5 -1.7 0.5 1.0
Nominal GDP 6.5 1.5 1.1 2.7 2.1 3.1
Consumer price index (annual average) 1.9 0.4 1.2… 1.9 0.9 1.2
Consumer price index (end of period) 0.7 1.0 0.2… 2.0 0.9 1.2
Unemployment rate (in percent) 14.4 15.8 14.6… 13.4 15.6 14.9
Saving rate (percent of GDP) 10.9 10.1 9.2… 12.0 14.0 14.3
Investment rate (percent of GDP) 28.8 27.7 31.2… 27.2 25.4 25.0
Financial sector
Credit to the nonfinancial public sector 14.9 23.6 4.0… 7.7 5.3 6.3
Credit to the private sector -0.3 -1.2 -2.8… -1.1 0.4 0.8
Liabilities to the private sector -0.1 0.2 1.2… -0.3 1.7 3.8
External sector
Exports of goods and services 10.5 -1.3 -1.4… -9.5 6.4 5.8
Of which: Travel receipts (gross) 7.9 -1.2 1.0… 3.0 7.6 4.5
Imports of goods and services 15.6 -2.6 5.0… -17.7 -3.8 3.5
(In percent of GDP, unless otherwise indicated)
Central government 1/
Revenue and grants 17.8 16.0 16.9 19.5 20.8 21.9
Expenditure 23.3 22.4 22.5 23.9 23.8 24.6
Overall balance 2/ -5.5 -6.4 -5.6 -4.4 -3.0 -2.7
Primary balance -3.2 -4.1 -3.1 -1.7 -0.1 0.2
Central government debt 48.0 55.4 60.2 64.4 65.9 67.0
External sector
Current account balance -17.9 -17.5 -22.0… -15.3 -11.4 -10.7
Change in net international reserves
(Increase -) 0.9 0.8 -0.5… -0.3 -0.4 -0.1
External public debt (end of period) 17.4 19.0 23.2… 23.2 23.2 22.9
Memorandum items:
Gross international reserves
(End of period; millions of U.S. dollars) 810 742 788… 812 850 859
In months of next year's G&S imports 2.0 1.8 2.3… 2.4 2.5 2.4
In percent of reserve money 90 86 80… 83 85 83
GDP (in millions of Bahamian dollars) 8,399 8,522 8,618 8,854 9,035 9,319
2/ Reflects reclassification of capital transfers and net lending, about 1 percent of GDP, to some public entities to current transfers.
Table 1. The Bahamas: Selected Social and Economic Indicators
1/ The data refer to fiscal years ending on June 30.
Sources: Central Bank of The Bahamas; Department of Statistics; Ministry of Finance; UNDP Human Development
Report; and Fund staff projections.
THE BAHAMAS
26 INTERNATIONAL MONETARY FUND
Prel.
FY13/14 FY14/15 FY15/16 FY16/17 FY17/18 FY18/19 FY19/20 FY20/21
Revenue 1,451 1,702 1,864 2,006 2,121 2,212 2,306 2,387
Tax revenue 1,246 1,500 1,679 1,816 1,924 2,007 2,094 2,169
Taxes on international trade 595 578 510 569 609 634 656 677
Tourism taxes 170 172 137 146 152 158 164 169
Other taxes 481 532 433 477 497 522 556 584
Value added tax (VAT) 219 599 624 666 693 718 740
Other revenue 205 201 185 190 197 205 212 218
Expenditure 1,930 2,084 2,128 2,258 2,329 2,399 2,460 2,498
Expense 1,680 1,806 1,914 1,955 1,996 2,053 2,101 2,128
Current expenditure 1,680 1,806 1,914 1,955 1,996 2,053 2,101 2,128
Wages and salaries 624 640 662 679 695 723 749 772
Goods and services 308 330 322 330 333 337 349 349
Interest payments 212 233 259 266 273 280 286 288
Subsidies and transfers 536 603 671 679 695 713 718 719
Net acquisition of nonfinancial assets 250 277 215 303 333 347 359 370
Net lending (+) / borrowing (–) 2/ -479 -382 -265 -251 -208 -187 -154 -110
Net acquisition of financial assets 0 0 0 0 0 0 0 0
Net incurrence of liabilities 479 382 265 251 208 187 154 110
Domestic 51 258 212 201 166 150 123 88
Foreign 428 124 53 50 42 37 31 22
Memorandum item:
Sources: Ministry of Finance; and Fund staff estimates and projections.
1/ Fiscal year ends June 30.
2/ Reflects reclassification of capital transfers and net lending, about 1 percent of GDP, to some public entities to current transfers.
Staff Projections
Table 2. The Bahamas: Operations of the Central Government 1/
(In millions of Bahamian dollars)
THE BAHAMAS
INTERNATIONAL MONETARY FUND 27
Prel. Staff Projections
FY13/14 FY14/15 FY15/16 FY16/17 FY17/18 FY18/19 FY19/20 FY20/21
Revenue 16.9 19.5 20.8 21.9 22.3 22.3 22.5 22.6
Tax revenue 14.5 17.2 18.8 19.8 20.2 20.3 20.4 20.5
Taxes on international trade 6.9 6.6 5.7 6.2 6.4 6.4 6.4 6.4
Tourism taxes 2.0 2.0 1.5 1.6 1.6 1.6 1.6 1.6
Other taxes 5.6 6.1 4.8 5.2 5.2 5.3 5.4 5.5
Value added tax (VAT) 2.5 6.7 6.8 7.0 7.0 7.0 7.0
Other revenue 2.4 2.3 2.1 2.1 2.1 2.1 2.1 2.1
Expenditure 22.5 23.9 23.8 24.6 24.5 24.2 24.0 23.6
Expense 19.6 20.7 21.4 21.3 21.0 20.7 20.5 20.1
Current expenditure 19.6 20.7 21.4 21.3 21.0 20.7 20.5 20.1
Wages and salaries 7.3 7.3 7.4 7.4 7.3 7.3 7.3 7.3
Goods and services 3.6 3.8 3.6 3.6 3.5 3.4 3.4 3.3
Interest payments 2.5 2.7 2.9 2.9 2.9 2.8 2.8 2.7
Subsidies and transfers 6.2 6.9 7.5 7.4 7.3 7.2 7.0 6.8
Net acquisition of nonfinancial assets 2.9 3.2 2.4 3.3 3.5 3.5 3.5 3.5
Net lending (+)/borrowing (–) 2/ -5.6 -4.4 -3.0 -2.7 -2.2 -1.9 -1.5 -1.0
Net acquisition of financial assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net incurrence of liabilities 5.6 4.4 3.0 2.7 2.2 1.9 1.5 1.0
Domestic 0.6 2.9 2.4 2.2 1.7 1.6 1.3 0.9
Foreign 5.0 1.4 0.6 0.5 0.4 0.4 0.3 0.2
Memorandum items:
Primary balance (In millions of B$) -267 -149 -6 15 66 93 132 178
In percent of GDP -3.1 -1.7 -0.1 0.2 0.7 0.9 1.3 1.7
Central government debt (In millions of B$) 5,158 5,629 5,893 6,145 6,353 6,540 6,694 6,804
In percent of GDP 60.2 64.4 65.9 67.0 66.8 66.0 65.3 64.4
Nominal GDP (In millions of B$) 8,570 8,736 8,944 9,177 9,517 9,903 10,255 10,571
Sources: Ministry of Finance; and Fund staff estimates and projections.
1/ Fiscal year ends June 30.
2/ Reflects reclassification of capital transfers and net lending, about 1 percent of GDP, to some public entities to current transfers.
Table 2. The Bahamas: Operations of the Central Government 1/ (Concluded)
(In percent of GDP)
THE BAHAMAS
28 INTERNATIONAL MONETARY FUND
2009 2010 2011 2012 2013 2014 2015
Central government debt 42.5 47.0 48.2 52.4 58.5 64.7 66.5
External 9.0 9.2 10.1 12.4 14.0 18.2 18.4
Domestic 33.5 37.8 38.1 40.0 44.5 46.5 48.1
Of which: in foreign currency 0.0 0.9 0.0 0.0 1.5 0.0 0.4
Public corporations' debt 12.1 13.6 14.5 16.3 16.0 17.6 17.4
External 0.8 2.4 3.1 5.0 5.0 6.1 4.9
Domestic 11.3 11.3 11.4 11.3 11.0 11.5 12.6
Of which: in foreign currency 5.5 5.5 5.3 5.1 4.7 4.1 5.3
Total public sector 54.6 60.7 62.7 68.7 73.2 81.4 82.3
External 9.8 11.6 13.2 17.4 19.0 23.2 23.2
Domestic 44.7 49.1 49.5 51.3 54.2 58.2 59.1
Of which: in foreign currency 5.5 6.4 5.3 5.1 4.8 5.2 5.3
Consolidated public sector 2/ 45.3 51.8 54.0 60.0 66.4 74.6 76.6
External 9.8 11.6 13.2 17.4 19.0 24.3 23.2
Domestic 2/ 35.5 40.2 40.8 42.6 47.5 50.3 53.3
Of which: in foreign currency 5.5 5.5 5.3 5.1 4.7 4.1 5.3
Source: Central Bank of The Bahamas.
1/ Calendar year basis.
2/ Excludes central government debt holdings by public corporations.
Table 3. The Bahamas: Outstanding Stock of Public Debt
(In percent of GDP) 1/
THE BAHAMAS
INTERNATIONAL MONETARY FUND 29
Est.
2013 2014 2015 2016 2017 2018 2019 2020 2021
Current account balance -1,494 -1,898 -1,352 -1,026 -997 -863 -765 -769 -753
Goods (trade balance) -2,211 -2,450 -2,369 -2,235 -2,316 -2,440 -2,559 -2,675 -2,770
Domestic exports 574 549 358 388 426 457 478 496 514
Domestic imports -2,763 -2,977 -2,707 -2,602 -2,720 -2,874 -3,014 -3,147 -3,260
Oil -485 -481 -332 -231 -278 -317 -348 -377 -401
Capital goods -657 -720 -674 -712 -727 -725 -731 -759 -784
Other domestic imports -1,621 -1,776 -1,700 -1,658 -1,714 -1,832 -1,936 -2,011 -2,075
Other net exports -22 -22 -20 -21 -22 -22 -23 -24 -25
Services 1,043 991 1,461 1,694 1,835 2,152 2,387 2,518 2,644
Travel (net) 2,022 2,097 2,140 2,318 2,428 2,688 2,965 3,130 3,285
Travel (credit) 2,285 2,308 2,378 2,559 2,675 2,945 3,233 3,408 3,572
Travel (debit) -262 -212 -238 -241 -247 -257 -268 -278 -287
Other services -979 -1,105 -678 -623 -593 -536 -577 -612 -641
Of which:
Construction services (net) -483 -645 -137 -182 -139 -42 -46 -50 -55
Offshore companies local expenditure (net) 180 201 159 189 196 205 213 222 231
Income and transfers -326 -439 -444 -486 -516 -575 -593 -612 -627
Capital and financial account 1,425 1,944 1,376 1,065 1,006 913 779 804 775
Capital transfers -10 -9 -19 -19 -20 -21 -21 -22 -23
Long-term public sector 138 500 76 512 49 40 34 68 -54
Commercial banks' NFA 62 -162 30 30 30 30 30 30 30
Foreign direct investment 382 251 76 213 270 282 304 331 365
Other private capital 1/ 853 1,363 1,213 330 677 583 433 398 458
Overall balance -69 46 24 38 9 50 14 35 22
Change in net international
reserves (increase -) 69 -46 -24 -38 -9 -50 -14 -35 -22
Current account balance -17.5 -22.0 -15.3 -11.4 -10.7 -8.9 -7.6 -7.4 -7.0
Goods (trade balance) -25.9 -28.4 -26.8 -24.7 -24.8 -25.1 -25.4 -25.7 -25.8
Domestic exports 6.7 6.4 4.0 4.3 4.6 4.7 4.7 4.8 4.8
Domestic imports -32.4 -34.5 -30.6 -28.8 -29.2 -29.6 -29.9 -30.2 -30.4
Oil -5.7 -5.6 -3.8 -2.6 -3.0 -3.3 -3.4 -3.6 -3.7
Capital goods -7.7 -8.4 -7.6 -7.9 -7.8 -7.5 -7.2 -7.3 -7.3
Other domestic imports -19.0 -20.6 -19.2 -18.4 -18.4 -18.9 -19.2 -19.3 -19.3
Other net exports -0.3 -0.3 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
Services 12.2 11.5 16.5 18.8 19.7 22.2 23.7 24.2 24.7
Travel (net) 23.7 24.3 24.2 25.7 26.1 27.7 29.4 30.0 30.6
Travel (credit) 26.8 26.8 26.9 28.3 28.7 30.3 32.0 32.7 33.3
Travel (debit) -3.1 -2.5 -2.7 -2.7 -2.7 -2.7 -2.7 -2.7 -2.7
Other services -11.5 -12.8 -7.7 -6.9 -6.4 -5.5 -5.7 -5.9 -6.0
Of which:
Construction services (net) -5.7 -7.5 -1.6 -2.0 -1.5 -0.4 -0.5 -0.5 -0.5
Income and transfers -3.8 -5.1 -5.0 -5.4 -5.5 -5.9 -5.9 -5.9 -5.8
Capital and financial account 16.7 22.6 15.5 11.8 10.8 9.4 7.7 7.7 7.2
Capital transfers -0.1 -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
Long-term public sector 1.6 5.8 0.9 5.7 0.5 0.4 0.3 0.7 -0.5
Commercial banks' NFA 0.7 -1.9 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Foreign direct investment 4.5 2.9 0.9 2.4 2.9 2.9 3.0 3.2 3.4
Other private capital 1/ 10.0 15.8 13.7 3.6 7.3 6.0 4.3 3.8 4.3
Overall balance -0.8 0.5 0.3 0.4 0.1 0.5 0.1 0.3 0.2
Change in net international
reserves (increase -) 0.8 -0.5 -0.3 -0.4 -0.1 -0.5 -0.1 -0.3 -0.2
Memorandum items:
Gross international reserves
(in millions of US dollars) 742 788 812 850 859 909 923 958 981
Nominal GDP (millions of U.S. dollars) 8,522 8,618 8,854 9,035 9,319 9,714 10,092 10,418 10,724
Sources: Central Bank; Department of Statistics; and Fund staff projections.
1/ Includes errors and omissions.
(In percent of GDP)
(In millions of U.S. dollars)
Table 4. The Bahamas: Balance of Payments
Staff Projections
THE BAHAMAS
30 INTERNATIONAL MONETARY FUND
Est.
2012 2013 2014 2015 2016 2017
(In millions of Bahamian dollars, end of period)
Central Bank
Gross international reserves 810 742 788 812 850 859
Net domestic assets 89 123 193 168 147 175
Credit to nonfinancial public sector (net) 390 488 504 485 463 492
Of which: Central Government 395 490 521 494 494 494
Other -301 -365 -310 -317 -317 -317
Reserve money 899 865 981 980 997 1,035
Currency held by the private sector 344 353 375 389 396 411
Liabilities with financial institutions 555 512 606 591 601 624
Financial system
Net foreign assets 208 46 286 280 289 268
Of which :
Held by commercial banks and OFIs -602 -695 -502 -532 -561 -591
Net domestic assets 6,095 6,271 6,105 6,094 6,192 6,459
Credit to nonfinancial public sector, net 1,715 2,121 2,206 2,376 2,502 2,658
Of which: Central Government 1,592 1,943 2,021 2,198 2,323 2,480
Credit to private sector 6,629 6,552 6,368 6,300 6,322 6,374
Other -2,249 -2,402 -2,469 -2,583 -2,632 -2,574
Liabilities to the private sector (broad money) 6,304 6,317 6,390 6,374 6,481 6,727
Money 1,575 1,641 1,996 2,071 2,106 2,186
Currency 217 214 233 247 251 260
Demand deposits 1,358 1,427 1,763 1,825 1,855 1,926
Quasi-money 4,729 4,676 4,394 4,303 4,375 4,541
(Change in percent of liabilities to the private sector at the beginning of the period)
Net foreign assets -1.1 -2.6 3.8 -0.1 0.1 -0.3
Net domestic assets 1.0 2.8 -2.6 -0.2 1.5 4.1
Credit to nonfinancial public sector 3.5 6.4 1.4 2.7 2.0 2.4
Credit to private sector -0.3 -1.2 -2.9 -1.1 0.3 0.8
Liabilities to private sector -0.1 0.2 1.2 -0.3 1.7 3.8
Money 2.2 1.1 5.6 1.2 0.5 1.2
Quasi-money -2.3 -0.8 -4.5 -1.4 1.1 2.6
(Annual percentage change)
Net domestic assets 1.1 2.9 -2.6 -0.2 1.6 4.3
Credit to nonfinancial public sector 14.9 23.6 4.0 7.7 5.3 6.3
Credit to private sector -0.3 -1.2 -2.8 -1.1 0.4 0.8
Liabilities to private sector -0.1 0.2 1.2 -0.3 1.7 3.8
Money 9.8 4.2 21.6 3.8 1.7 3.8
Quasi-money -3.0 -1.1 -6.0 -2.1 1.7 3.8
Sources: Central Bank of The Bahamas; and Fund staff estimates and projections.
Table 5. The Bahamas: Summary Accounts of the Central Bank and the Financial System
Staff Projections
Table 6. Risk Assessment Matrix 1/
Sources of Risks Likelihood Potential Impact Policy Response
Medium Medium
Further significant delay in
Baha Mar opening
Baha Mar opening has already been
delayed several times.
Delays continue to hamper growth
prospects and could eventually have an
adverse impact on The Bahamas’
reputation as a tourism destination and
business-friendly economy.
Coordinate with stakeholders to address any
shortcomings that would lead to further delays.
Continued fiscal consolidation and prompt
implementation of structural reforms to boost
investor confidence and attract FDI.
Low Medium
Natural disasters Severe weather related disasters have
been less frequent and damaging than in
other Caribbean countries.
Even if average disaster damage has been
moderate in the past, a large hurricane
could severely damage roads, housing,
and tourism infrastructure.
Formulate adequate budgetary provisions for
disaster mitigation.
Enhance reliance through infrastructure
investment.
Build fiscal and external buffers.
High Medium
Tighter or more volatile
global financial conditions:
Further surge in the US
dollar.
Improving U.S. economic prospects
versus the rest of the world leads to a
further dollar surge.
Could further weaken cost
competitiveness, although impact is
mitigated by the large share of trade with
the U.S.
Continued fiscal consolidation centered on
reducing current expenditure given the limited
buffers available.
Diversify growth drivers over the medium-term,
including building a broader tourist base.
Strengthen competitiveness.
Dislocation in capital flows
Reduced financial services
by global/regional banks
(“de-risking”).
Medium
Further loss of correspondent banking
services significantly curtails cross-border
payments, trade finance, and remittances.
Medium
Continued loss of CBRs could have
adverse impacts on the financial sector.
Diversify growth drivers over the medium-term.
Strong implementation of AML/CFT regulations.
Continue monitoring the status of CBRs and
conduct periodic risk assessments.
1/ The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (that is, which is the scenario most likely to materialize in the view of IMF staff). The relative
likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline. The RAM reflects staff's views on the source of risks and overall level of concerns as of the
time of preparation of this document
INTER
NA
TIO
NA
L MO
NETA
RY F
UN
D
31
TH
E B
AH
AM
AS
Table 6. Risk Assessment Matrix (Concluded)
Sources of Risks Likelihood Potential Impact Policy Response
Sharper-than-expected global
growth slowdown:
Medium High
Weak domestic demand in key advanced
and emerging market economies reduces
medium term global growth.
The tourism sector is particularly sensitive
to growth in advanced economies, mostly
the U.S., but also other advanced
economies.
Continued fiscal consolidation centered on
reducing current expenditure given the limited
buffers available.
Diversify growth drivers over the medium-term,
including building a broader tourist base.
Strengthen competitiveness.
Persistently lower energy
prices
Medium
Persistently low prices triggered by
supply factors reversing only gradually.
Low
Lower commodity prices would be
favorable, reducing the value of imports
and the cost of energy production.
Use as an opportunity to speed-up the reform of
the energy sector.
High Medium
Emergence of Cuba as a
competitor
As relations with the U.S. ease and hotels
are renovated, Cuba could emerge as a
competitor over the medium term.
The positioning of the hotel industry as a
high-end niche and efforts to develop
synergies with Cuba could limit the
adverse impact on The Bahamas.
Continue building a broader tourist base and
developing synergies with Cuba.
32
IN
TER
NA
TIO
NA
L MO
NETA
RY F
UN
D
TH
E B
AH
AM
AS
THE BAHAMAS
INTERNATIONAL MONETARY FUND 33
Annex I. Debt Sustainability Analysis
Central government debt has increased, reflecting weaker than expected fiscal stance and continued
low growth, but is expected to stabilize at 67 percent and decline gradually over the medium-term.
External financing requirement remains a significant risk to the debt profile, mitigated by the projected
strengthening of the current account in the medium term. Rising fiscal vulnerabilities underline the
need to implement staff recommendations, including resolute implementation of fiscal consolidation
and structural reforms to lift potential growth.
1. Debt stock and gross financing requirements. Central government debt reached 64.4
percent of GDP in FY 2014/15, up by 4.2 percentage points owing to a weaker than expected fiscal
stance, continued low growth and high interest costs. Under the baseline scenario, staff projects
debt to peak at 67 percent of GDP in FY2016/17, higher than projected last year, and to gradually
fall to 64.4 percent over the medium term. As a result, gross financing requirement will decline from
8.4 percent of GDP in FY 2014/15 to about 3.2 percent of GDP. Ample liquidity in the domestic
banking system and a captive investor base will continue to ease rollover concerns.
2. Debt profile and vulnerabilities. Despite continued increases in debt, its composition
remains favorable. A large proportion, 72 percent of total debt, is held in local currency. Short term
debt is only 12.7 percent of total debt and is denominated in local currency. The weighted average
time to maturity for the government’s domestic and external bonds are 9.6 and 16 years,
respectively. Overall, the heat map continues to point to low to moderate risks to debt sustainability.
Nevertheless, largely reflecting the still sizable current account deficit, external financing
requirement, which surpasses the benchmark for emerging market comparators, remains a
significant risk to the debt profile.
3. Realism of baseline assumptions. Staff projects real growth to average 1.6 percent over
the medium term. Inflation is expected to remain low (1.6 percent), while the primary balance is
projected to gradually improve from a small deficit this year to a surplus of 1.7 percent at the end of
the forecast period. With respect to growth assumptions, there appears to be no systematic bias in
staff’s recent forecast, as projections have been close to the outcomes. Meanwhile, past projections
for primary balance appear to have been relatively optimistic, while inflation has turned out better
than expected. Staff does not view the historical primary balance as an appropriate comparator for
the projected primary balance path mainly because debt levels have generally been low in the past,
supported by stronger growth. Staff’s projected primary balance path is feasible, leaving room for
growth–enhancing expenditures, and is less ambitious than the path projected by the authorities.
4. Macro–fiscal stress test. Shocks to the baseline macro–fiscal variables could moderately
worsen the debt path, and slightly raise the gross financing requirements. Real GDP growth shock
remains the most significant, and could push the debt to 73.6 percent of GDP at the end of the
projection period, compared with baseline projection of around 64.4 percent of GDP. Primary
balance and real interest rate shocks could raise debt to around 70 percent of GDP. Exposure to real
exchange rate shocks remains the least significant, with debt rising to 68 percent of GDP. Gross
THE BAHAMAS
34 INTERNATIONAL MONETARY FUND
financial requirements are, however, most sensitive to the real interest rate. A combined macro–
fiscal shock would raise debt to 78 percent of GDP, and gross financing requirements to 6.1 percent
of GDP in 2020/21.
5. Adverse scenarios. Staff considered two approaches that assume worse macro–fiscal
outlook: (1) the constant primary balance and, (2) the historical average approaches. Under the first
approach, the primary balance is assumed to, over the medium term, stay at the projected level for
FY2015/16 (-0.1 percent of GDP), with the other variables, except the real effective interest rate,
remaining as they are in the baseline. In this scenario, debt will rise to 73.7 percent of GDP in
2020/21. Under the second approach, real GDP growth and the primary balance are assumed to stay
at 0.3 percent and -1.9 percent, respectively, from 2017 onwards. This second scenario indicates a
sharp further rise of the debt burden (to 91.8 percent of GDP) over the medium term with gross
financing requirements also rising to 9.3 percent of GDP. This reinforces the need for a steadfast
implementation of the fiscal consolidation program to achieve a more sustainable debt path.
6. Natural disaster shock. A severe shock (calibrated based on the average sized–natural
disaster damage) that reduces baseline real GDP growth by 2.5 percent and 1.5 percent for 2017 and
2018, respectively, and worsens the primary balance by 1.25 percent and 0.75 percent of GDP over
the same period, would raise the debt level to 73.6 percent of GDP by 2021.
7. Fiscal contingent liabilities. The analysis has focused on the central government sector due
to lack of consolidated general government and public sector data. Nonetheless, it is worth
mentioning that fiscal risks emanating from public entities and the public pension system (see
Annex II) are significant, and could further exacerbate the debt path if they materialize. Debt of
public entities amounted to 17.6 percent of GDP in 2014/15, of which 8.2 percent of GDP are
government guaranteed. The unfunded pension liabilities of the public pension system, amounts to
around $2.2 billion (about 26.2 percent of GDP), and in addition to the implicit debt of the social
security system, estimated at about 50 percent of GDP in 2015, are projected to grow further in the
next decades due to population aging.
8. External debt. Estimated at 24.2 percent of GDP in 2014/15, external public debt, (central
government and public corporations) remains relatively low and is projected to stabilize at
22.3 percent over the projection horizon. The residual suggests that the private sector external debt
will continue to accumulate, albeit at a declining pace. Bound test results suggest that the external
public debt profile is moderately sensitive to shocks to the non-interest current account and the real
exchange rate.
THE BAHAMAS
INTERNATIONAL MONETARY FUND 35
As of April 15, 2016
2014 2015 2016 2017 2018 2019 2020 2021 Sovereign Spreads
Nominal gross public debt 39.0 60.2 64.4 65.9 67.0 66.8 66.0 65.3 64.4 Spread (bp) 2/ n.a.
Public gross financing needs 5.5 9.9 8.4 4.2 6.0 4.1 3.5 3.1 3.2 CDS (bp) n.a.
Real GDP growth (in percent) 0.7 -0.3 -1.1 -0.6 0.7 1.6 2.2 1.8 1.4 Ratings Foreign Local
Inflation (GDP deflator, in percent) 1.4 1.6 3.1 3.0 1.8 2.1 1.9 1.7 1.6 Moody's Baa2 Baa2
Nominal GDP growth (in percent) 2.1 1.3 1.9 2.4 2.6 3.7 4.1 3.6 3.0 S&Ps BBB- BBB-
Effective interest rate (in percent) 3/ 5.7 4.5 4.5 4.0 4.0 3.7 3.4 3.2 3.0 Fitch n.a. n.a.
2014 2015 2016 2017 2018 2019 2020 2021 cumulative
Change in gross public sector debt 3.1 4.8 4.2 1.5 1.1 -0.2 -0.7 -0.8 -0.9 0.0
Identified debt-creating flows 3.0 4.9 3.2 1.1 0.7 -0.7 -1.3 -1.5 -1.7 -3.4
Primary deficit 1.7 3.1 1.7 0.1 -0.1 -0.7 -0.9 -1.3 -1.7 -4.6
Primary (noninterst) revenue and grants 16.5 16.9 19.5 20.8 21.8 22.3 22.3 22.5 22.6 132.3
Primary (noninterest) expenditure 18.2 20.0 21.2 20.9 21.7 21.6 21.4 21.2 20.9 127.7
Automatic debt dynamics 4/
1.3 1.8 1.5 1.0 0.9 0.0 -0.4 -0.2 0.0 1.2
Interest rate/growth differential 5/
1.3 1.8 1.5 1.0 0.9 0.0 -0.4 -0.2 0.0 1.2
Of which: real interest rate 1.5 1.6 0.9 0.7 1.4 1.0 1.0 0.9 0.9 5.8
Of which: real GDP growth -0.2 0.1 0.6 0.4 -0.5 -1.0 -1.4 -1.2 -0.9 -4.6
Exchange rate depreciation 6/
0.0 0.0 0.0 … … … … … … …
Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other debt-creating flows (specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Residual, including asset changes 7/
0.1 -0.1 1.0 0.4 0.3 0.5 0.6 0.7 0.8 3.3
Source: Fund Staff Calculations.
1/ Public sector is defined as central government.
2/ Bond Spread over U.S. Bonds.
3/ Defined as interest payments divided by debt stock at the end of previous year.
4/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate;
a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
5/ The real interest rate contribution is derived from the denominator in footnote 4 as r - π (1+g) and the real growth contribution as -g.
6/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).
7/ For projections, this line includes exchange rate changes during the projection period.
8/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure A1.1. The Bahamas: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario
0.0
balance 8/
primary
(in percent of GDP unless otherwise indicated)
Debt, Economic and Market Indicators 1/
2005-2013
Actual
Projections
Contribution to Changes in Public Debt
Projections
2005-2013
Actual
debt-stabilizing
-15
-10
-5
0
5
10
15
cumulative
-4
-2
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Debt-Creating Flows
Primary deficit Real GDP growth Real interest rate Exchange rate depreciation
Other debt-creating flows Residual Change in gross public sector debt
projection
(in percent of GDP)
THE BAHAMAS
36 INTERNATIONAL MONETARY FUND
Baseline Scenario 2016 2017 2018 2019 2020 2021 Histocial Scenario 2016 2017 2018 2019 2020 2021
Real GDP growth -0.6 0.7 1.6 2.2 1.8 1.4 Real GDP growth -0.6 0.3 0.3 0.3 0.3 0.3
Inflation 3.0 1.8 2.1 1.9 1.7 1.6 Inflation 3.0 1.8 2.1 1.9 1.7 1.6
Primary Balance -0.1 0.1 0.7 0.9 1.3 1.7 Primary Balance -0.1 -1.9 -1.9 -1.9 -1.9 -1.9
Effective interest rate 4.0 4.0 3.7 3.4 3.2 3.0 Effective interest rate 4.0 4.5 4.9 5.2 5.4 5.6
Constant Primary Balance Scenario
Real GDP growth -0.6 0.7 1.6 2.2 1.8 1.4
Inflation 3.0 1.8 2.1 1.9 1.7 1.6
Primary Balance -0.1 -0.1 -0.1 -0.1 -0.1 -0.1
Effective interest rate 4.0 4.5 4.6 4.6 4.6 4.7
Source: Fund Staff calculations.
Underlying Assumptions(in percent)
Figure A1.2. The Bahamas: Public DSA - Composition of Public Debt and Alternative Scenarios
Alternative Scenarios
Composition of Public Debt
Baseline Historical Constant Primary Balance
40
50
60
70
80
90
100
2014 2015 2016 2017 2018 2019 2020 2021
Gross Nominal Public Debt
(in percent of GDP)
projection
0
2
4
6
8
10
12
2014 2015 2016 2017 2018 2019 2020 2021
Public Gross Financing Needs
(in percent of GDP)
projection
0
10
20
30
40
50
60
70
80
2005 2007 2009 2011 2013 2015 2017 2019 2021
By Maturity
Medium and long-term
Short-term
projection
(in percent of GDP)
0
10
20
30
40
50
60
70
80
2005 2007 2009 2011 2013 2015 2017 2019 2021
By Currency
Local currency-denominated
Foreign currency-denominated
projection
(in percent of GDP)
TH
E B
AH
AM
AS
INTER
NA
TIO
NA
L MO
NETA
RY F
UN
D
37
Source: Fund Staff calculations.
1/ Plotted distribution includes all countries, percentile rank refers to all countries.
2/ Projections made in the spring WEO vintage of the preceding year.
3/ Not applicable for Bahamas, The.
4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.
Figure A1.3. The Bahamas: Public DSA - Realism of Baseline Assumptions
Forecast Track Record, versus all countries
Boom-Bust Analysis 3/Assessing the Realism of Projected Fiscal Adjustment
-10
-8
-6
-4
-2
0
2
4
6
2007 2008 2009 2010 2011 2012 2013 2014 2015
Year 2/
Real GDP Growth
Distribution of forecast errors:
Median
Bahamas, The forecast error
-0.47
43%Has a percentile rank of:
Bahamas, The median forecast error, 2007-2015:
Distribution of forecast
errors: 1/
(in percent, actual-projection)
-10
-8
-6
-4
-2
0
2
4
2007 2008 2009 2010 2011 2012 2013 2014 2015
Year 2/
Primary Balance
Distribution of forecast errors:
Median
Bahamas, The forecast error
-1.19
27%Has a percentile rank of:
Bahamas, The median forecast error, 2007-2015:
Distribution of forecast
errors: 1/
(in percent of GDP, actual-projection)
-6
-4
-2
0
2
4
6
8
10
2007 2008 2009 2010 2011 2012 2013 2014 2015
Year 2/
Inflation (Deflator)
Distribution of forecast errors:
Median
Bahamas, The forecast error
-1.04
3%Has a percentile rank of:
Bahamas, The median forecast error, 2007-2015:
Distribution of forecast
errors: 1/
(in percent, actual-projection)
pess
imis
tic
op
tim
isti
c
-6
-4
-2
0
2
4
6
8
t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5
Real GDP growth
Bahamas, The
(in percent)
0
2
4
6
8
10
12
14
Less -4 -3 -2 -1 0 1 2 3 4 5 6 7 8
Distribution 4/
Bahamas, The
3-Year Adjustment in Cyclically-Adjusted
Primary Balance (CAPB)(Percent of GDP)
Mo
re
3-year CAPB adjustment
greater than 3 percent of GDP
in approx. top quartilehas a percentile
rank of 15%
0
2
4
6
8
10
12
Less -4 -3 -2 -1 0 1 2 3 4 5 6 7 8
Distribution 4/
Bahamas, The
3-Year Average Level of Cyclically-Adjusted Primary
Balance (CAPB)(Percent of GDP)
Mo
re
3-year avgerage CAPB level
greater than 3.5 percent of
GDP in approx. top quartilehas a percentile
rank of 57%
THE BAHAMAS
38 INTERNATIONAL MONETARY FUND
Primary Balance Shock 2016 2017 2018 2019 2020 2021 Real GDP Growth Shock 2016 2017 2018 2019 2020 2021
Real GDP growth -0.6 0.7 1.6 2.2 1.8 1.4 Real GDP growth -0.6 -1.2 -0.3 2.2 1.8 1.4
Inflation 3.0 1.8 2.1 1.9 1.7 1.6 Inflation 3.0 1.4 1.6 1.9 1.7 1.6
Primary balance -0.1 -0.5 0.0 0.9 1.3 1.7 Primary balance -0.1 -0.4 -0.4 0.9 1.3 1.7
Effective interest rate 4.0 4.5 4.6 4.6 4.7 4.7 Effective interest rate 4.0 4.5 4.6 4.6 4.7 4.7
Real Interest Rate Shock Real Exchange Rate Shock
Real GDP growth -0.6 0.7 1.6 2.2 1.8 1.4 Real GDP growth -0.6 0.7 1.6 2.2 1.8 1.4
Inflation 3.0 1.8 2.1 1.9 1.7 1.6 Inflation 3.0 2.1 2.1 1.9 1.7 1.6
Primary balance -0.1 0.1 0.7 0.9 1.3 1.7 Primary balance -0.1 0.1 0.7 0.9 1.3 1.7
Effective interest rate 4.0 4.5 5.0 5.5 5.9 6.3 Effective interest rate 4.0 4.5 4.6 4.6 4.7 4.7
Combined Shock
Real GDP growth -0.6 -1.2 -0.3 2.2 1.8 1.4
Inflation 3.0 1.4 1.6 1.9 1.7 1.6
Primary balance -0.1 -0.5 -0.4 0.9 1.3 1.7
Effective interest rate 4.0 4.5 5.2 5.7 6.1 6.5
Source: Fund staff calculations.
(in percent)
Real Exchange Rate Shock
Combined Macro-Fiscal Shock
Additional Stress Tests
Baseline
Underlying Assumptions
Hurricane Shock
Figure A1.4. The Bahamas: Public DSA - Stress Tests
Macro-Fiscal Stress Tests
Baseline Primary Balance Shock
Real GDP Growth Shock
Real Interest Rate Shock
58
60
62
64
66
68
70
72
74
76
2016 2017 2018 2019 2020 2021
Gross Nominal Public Debt(in percent of GDP)
200
220
240
260
280
300
320
340
2016 2017 2018 2019 2020 2021
Gross Nominal Public Debt
(in percent of Revenue)
0
1
2
3
4
5
6
7
8
2016 2017 2018 2019 2020 2021
Public Gross Financing Needs
(in percent of GDP)
55
60
65
70
75
80
2016 2017 2018 2019 2020 2021
Gross Nominal Public Debt(in percent of GDP)
200
220
240
260
280
300
320
340
360
2016 2017 2018 2019 2020 2021
Gross Nominal Public Debt
(in percent of Revenue)
0
1
2
3
4
5
6
7
8
9
2016 2017 2018 2019 2020 2021
Public Gross Financing Needs
(in percent of GDP)
THE BAHAMAS
INTERNATIONAL MONETARY FUND 39
Bahamas, The
Source: Fund staff calculations.
4/ An average over the last 3 months, 16-Jan-16 through 15-Apr-16.
Real GDP
Growth Shock
2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not
baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
Figure A1.5. The Bahamas: Public DSA Risk Assessment
1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline,
red if benchmark is exceeded under baseline, white if stress test is not relevant.
Real Interest
Rate Shock
External
Financing
Requirements
Real GDP
Growth Shock
Heat Map
Upper early warning
Evolution of Predictive Densities of Gross Nominal Public Debt
(in percent of GDP)
Debt profile 3/
Lower early warning
200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45
percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.
Foreign
Currency
Debt
Public Debt
Held by Non-
Residents
(Indicators vis-à-vis risk assessment benchmarks)
Market
Perception
Gross financing needs 2/
Primary Balance
Shock
Real Interest
Rate Shock
Exchange Rate
Shock
Contingent
Liability Shock
Primary Balance
Shock
Debt Profile Vulnerabilities
3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if
country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white.
Lower and upper risk-assessment benchmarks are:
Change in the
Share of Short-
Term Debt
Exchange Rate
Shock
Contingent
Liability shock
Debt level 1/
20
60
28%
1 2
200
600
no
data
1 2
5
15
19%
1 2
0.5
1
0%
1 2
Bond Spread over
U.S. Bonds
External Financing
Requirement
Annual Change in
Short-Term Public
Debt
Public Debt in
Foreign Currency
(in basis points) 4/ (in percent of GDP) (in percent of total) (in percent of total)
0
10
20
30
40
50
60
70
80
2014 2015 2016 2017 2018 2019 2020 2021
10th-25th 25th-75th 75th-90thPercentiles:Baseline
Symmetric Distribution
0
10
20
30
40
50
60
70
80
2014 2015 2016 2017 2018 2019 2020 2021
Restricted (Asymmetric) Distribution
no restriction on the growth rate shock
no restriction on the interest rate shock
0 is the max positive pb shock (percent GDP)
no restriction on the exchange rate shock
Restrictions on upside shocks:
15
45
28%
1 2
Public Debt Held by
Non-Residents
(in percent of total)
THE BAHAMAS
40 INTERNATIONAL MONETARY FUND
i-rate
shock23
Baseline
23
0
5
10
15
20
25
30
35
2010 2012 2014 2016 2018 2021
Interest rate shock (in percent)
Figure A1.6. The Bahamas: External Debt Sustainability: Bound Tests 1/
(External debt, in percent of GDP)
Sources: International Monetary Fund, Country desk data, and Fund staff estimates.
1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in
the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-
year historical average for the variable is also shown.
2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
3/ One-time real depreciation of 30 percent occurs in 2010.
Historical
25
Baseline
23
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
40
45
50
55
2010 2012 2014 2016 2018 2021
Baseline and historical scenarios
CA shock
35
Baseline 23
0
5
10
15
20
25
30
35
40
45
2010 2012 2014 2016 2018 2021
Combined
shock
29
Baseline
23
0
5
10
15
20
25
30
35
2010 2012 2014 2016 2018 2021
Combined shock 2/
34
Baseline 23
0
5
10
15
20
25
30
35
40
2010 2012 2014 2016 2018 2021
Real depreciation shock 3/
30% depreciation
Growth
shock 22
Baseline23
0
5
10
15
20
25
30
35
2010 2012 2014 2016 2018 2021
Growth shock (in percent per year)
Baseline:
Scenario:
Historical:
4.7
5.8
4.4
Baseline:
Scenario:
Historical:
0.3
-1.2
0.1
Baseline:
Scenario:
Historical:
-10.8
-13.1
-
TH
E B
AH
AM
AS
INTER
NA
TIO
NA
L MO
NETA
RY F
UN
D
41
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Debt-stabilizing
non-interest
current account 6/
Baseline: External debt 15.4 17.5 18.8 23.4 23.7 23.9 24.0 23.4 23.1 22.7 22.3 -2.9
Change in external debt 0.7 2.1 1.3 4.6 0.3 0.2 0.1 -0.6 -0.3 -0.4 -0.5
Identified external debt-creating flows (4+8+9) 7.0 10.9 13.0 19.1 14.0 9.1 7.8 5.7 4.3 4.1 3.5
Current account deficit, excluding interest payments 14.5 17.1 16.6 21.0 14.0 10.1 9.5 7.7 6.5 6.3 6.0
Deficit in balance of goods and services 11.8 14.9 13.7 16.9 10.3 6.0 5.2 3.0 1.7 1.5 1.2
Exports 42.2 43.8 42.6 41.5 36.6 38.1 39.1 41.0 42.9 43.7 44.4
Imports 54.0 58.6 56.3 58.4 46.8 44.1 44.3 44.0 44.6 45.2 45.6
Net non-debt creating capital inflows (negative) -8.2 -6.1 -4.3 -2.7 -0.6 -2.1 -2.7 -2.7 -2.8 -3.0 -3.2
Automatic debt dynamics 1/ 0.6 -0.1 0.6 0.8 0.6 1.2 1.0 0.7 0.6 0.7 0.7
Contribution from nominal interest rate 0.6 0.8 0.9 1.0 1.2 1.3 1.2 1.2 1.1 1.1 1.0
Contribution from real GDP growth -0.1 -0.4 0.0 0.1 0.4 -0.1 -0.2 -0.5 -0.5 -0.3 -0.3
Contribution from price and exchange rate changes 2/ 0.1 -0.5 -0.3 -0.3 -1.0 ... ... ... ... ... ...
Residual, incl. change in gross foreign assets (2-3) 3/ -6.3 -8.8 -11.7 -14.5 -13.7 -8.9 -7.7 -6.3 -4.6 -4.4 -4.0
External debt-to-exports ratio (in percent) 36.6 40.1 44.2 56.4 64.9 62.8 61.4 57.1 53.9 52.1 50.2
Gross external financing need (in billions of US dollars) 4/ 1.2 1.5 1.5 1.9 1.4 1.1 1.0 0.9 0.8 0.8 0.9
in percent of GDP 15.3 18.1 18.0 22.2 15.5 11.6 11.2 9.4 8.1 7.9 8.3
Scenario with key variables at their historical averages 5/ 10-Year 10-Year 16.5 16.8 18.4 21.5 25.0 28.9 -6.1
Historical Standard
Key Macroeconomic Assumptions Underlying Baseline Average Deviation
Real GDP growth (in percent) 0.6 3.1 0.0 -0.5 -1.7 0.1 2.3 0.5 1.0 2.2 2.1 1.5 1.3
GDP deflator in US dollars (change in percent) -0.9 3.3 1.5 1.7 4.5 1.4 1.8 1.6 2.1 2.0 1.7 1.7 1.6
Nominal external interest rate (in percent) 4.1 5.6 5.2 5.5 5.3 4.4 1.0 5.5 5.2 5.0 4.9 4.8 4.6
Growth of exports (US dollar terms, in percent) 3.6 10.5 -1.3 -1.4 -9.5 1.2 11.2 6.4 5.8 9.3 8.6 5.1 4.7
Growth of imports (US dollar terms, in percent) 12.9 15.6 -2.6 5.0 -17.7 2.3 13.1 -3.8 3.5 3.6 5.3 4.6 3.8
Current account balance, excluding interest payments -14.5 -17.1 -16.6 -21.0 -14.0 -14.2 3.9 -10.1 -9.5 -7.7 -6.5 -6.3 -6.0
Net non-debt creating capital inflows 8.2 6.1 4.3 2.7 0.6 6.9 3.4 2.1 2.7 2.7 2.8 3.0 3.2
1/ Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate.
e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.
2/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).
3/ For projection, line includes the impact of price and exchange rate changes.
4/ Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
5/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
6/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.
Table A1.1. The Bahamas: External Debt Sustainability Framework, 2011-2021
(In percent of GDP, unless otherwise indicated)
Actual
THE BAHAMAS
42 INTERNATIONAL MONETARY FUND
Annex II. The Public Pension System—A Case for Reform
The Bahamas public pension system consists predominantly of partially funded and unfunded defined
benefit schemes. Pension obligations, already sizable, are expected to rise in the next two decades due
to population aging. Absent reform, the pension system will pose an increasing financial burden.
A. Government Pension Scheme
1. Scheme. The government’s non–contributory scheme provides retirement pensions from
age 65 to eligible public officers—mainly direct government employees, the police and the defense
force—with at least 5 years of service (Table 1). Pension benefits vary. For officers in the general
public service, with tenure of 30 years, the retirement pension is 1/60 of pensionable earnings each
year, up to a maximum of 40 years.
2. Costs and liabilities. Government pensioners (15 percent of the public work force) receive
pension payments from the budget that, on average, stood at 1 percent of GDP and 7.3 percent of
tax revenue per year in 1994–2014. The accrued pension liabilities totaled B$1.5 billion in 20121
(17.9 percent of GDP). Pension payments and liabilities are projected to reach B$230million
(1.5 percent of GDP) and B$3.7 billion (24 percent of GDP), respectively by 2030.
B. Public Entities Pension Scheme
3. Schemes. Most public entities have non–contributory schemes, separate from that of the
government and the National Insurance Scheme (NIS). The benefit structure and eligibility
requirements are different across entities, perhaps reflecting negotiation with unions, the absence of
national pension regulation and limited government oversight. The schemes provide benefits to
retirees from age 60, at 2 percent of their pensionable earnings, up to a maximum of 40 years. A few
entities, however, have introduced defined contribution pension especially for new employees.
4. Costs and liabilities. Key entities are estimated to spend a combined B$12 million annually,
representing partial, advanced funding of accruing pensions. Their combined pension shortfall–
unfunded component of future pensions2– amounted to B$0.7billion (8.3 percent of GDP). Pension
cost, reportedly a drain on most entities’ cash flow, also impacts their viability, due to limited
resources left for productive capital spending. Entities such as the Water and Sewerage Corporation
(WSC), Bahamasair, and Bahamas Electricity Corporation (BEC) continue to record financial losses as
a result of their public service mandates, operational inefficiencies and inadequate regulatory
framework. Reflecting aged facilities and generous employment policies, their operating cost are
noted to be particularly high while tariffs remain low, necessitating continued budget support, which
amounted to B$116.8 million (1.4 percent of GDP) in FY2014/15. Moreover, the pace of public
1 In independent assessment by a consultant hired by the government.
2 Defined as accumulated pension assets less accrued pension liabilities to current employees and retirees.
THE BAHAMAS
INTERNATIONAL MONETARY FUND 43
entities reform is lagging, and could hamper efforts towards alleviating infrastructure bottlenecks,
enhancing medium term growth and stemming their drag on public finances.
C. The National Insurance Scheme Pension
5. Scheme. The National Insurance Scheme (NIS), the backbone of social protection, offers a
contributory, partially funded, pay-as-you go (PAYG) old–age pension, covering 70 percent of the
labor force, and financed by payroll taxes paid by employers and employees.
6. Costs, liabilities and funding. Old–age pension benefits stood at 2 percent of GDP in 2013
(three–quarters of total benefits), for pensioners, equivalent to 23.4 percent of the employed
workforce. Cash surplus
generated since inception has
helped to build reserves, about
20 percent of GDP in 2014,
invested in domestic assets,
which could cover about 7.6
years of benefit payments
without additional revenue
(Table 2).3 Compared with
Caribbean peers, excluding
Jamaica, The Bahamas NIS
appears to lag behind in
contribution rate, asset
accumulation and
administration cost. However,
3 Nassar, K., Okwuokei, J., Li, M., Robinson T., and Thomas, S. (2016): “National Insurance Scheme Reforms in the
Caribbean”, Forthcoming IMF working paper.
Bahamas Barbados Jamaica St. Lucia St. Kitts
Contribution rate 9.8 18.0 5.0 10 10.0
Premium gap -10.0 0.0 -6.5 -6.7 -5.6
Reserves
GDP ratio 20.0 43.7 4.4 46.1 59.1
benefits expenditure ratio 7.6 8.2 5.1 30.7 24.4
Pensionable age (in years)
Mandatory 65 66.5 63 65 62
Early retirement 60 62 … 60 …
Life expectancy (in years)
At birth 76 78 75 74 76
At age 60 21 23 22 21 19
Administrative Cost
Contribution ratio 24.6 5.2 8.1 11.4 17.5
GDP ratio 0.7 0.3 0.1 0.3 0.6
1 /Latest available, or stated otherwise
Sources: National Authorities; Social Security Programs Throughout the World; WHO; and Fund Staff Calculations.
Bahamas NIS: Selected Demographic and Performance Indicators 1/
(In percent, unless stated othewise)
Government Public Entities 1/
Retirement pension 1/60 of pensionable earnings from age 65 per year, up to
maximum of 40 years, for officers in the general public servcie
with over 30 years of service
2 percent of pensionable earnings from age 60 per year, up
to maximum of 40 years
Pensionable earnings Earnings in final year of service Final year of service, average earnings in the last 2, 3, or 5
years of service
Employee contribution None None, 3-5 percent contribution plus voluntary contribution
Early retirement After 30 years of service, or reaching age 55 and having
completed 5 years of service
After 30 years of service, or reaching age 50, or 55
Leaving service Cash benefits of 4 percent of final salary per year after 10 years
of service
Cash benefits of 4 percent of final salary after 10 years of
service, cash benefits of 4 percent of average earnings after
10 years of service
Death in service Final year salary at death Depends on the extent to which monthly retirement pension
has been made.
Cost of Living Adjustment None None, 2-5 percent maximum
Source: Ministry of Finance.
1/ Benefits vary across entities
Public Sector Employees Pension Benefits
THE BAHAMAS
44 INTERNATIONAL MONETARY FUND
as a result of low growth, high unemployment, relatively low contribution rate, and compliance
issues, the income from contributions (2.7 percent of GDP) can no longer finance total expenditure
(3.3 percent of GDP). Beyond 2033, the scheme is projected to run operational deficits as it matures.
7. Changing demographics will further increase pension outlays. Demographic trends are
unfavorable, and point to further increases in pension
liabilities. Fertility rate (2 percent in 2010) will stabilize
at 2.2 percent in 2030, below replacement levels.
Combined with high and rising life expectancy,
projected to reach 79 percent in 2030, old–age
dependency ratio4 would increase four–fold from 9.4
percent in 2010 to 38 percent in 2075. Thus, under
the current benefit rules, pension liabilities would
become fiscally unsustainable in the next two
decades, as a significant number of employees retire.5
8. High administrative costs. At the same time, as highlighted by the 2011 actuarial report,
the NIS administrative costs are high, equivalent to about one–quarter of contributions in 2013,
mostly reflecting increasing staff size, its relatively large role, operational inefficiencies, and the
difficulties of rendering social services in the archipelago.6
D. Options for Reform
9. Pension reform is inevitable. Staff analysis indicates that a parametric reform that raises
the contribution rate by 1 percent, freezes pension benefits for two years, and raises the retirement
rate from 65 to 67 years, if implemented together, will nearly wipe out the NIS implicit debt,
estimated at 49 percent in 2015, and put the pension scheme on a sound financial footing.7 Table 3
provides a menu of policy recommendations for the different pension schemes. The authorities
should begin to take steps to implement policies that would contain increases in pension costs, and
over the medium, gradually phase in more far-reaching reforms.
4 Defined as elderly population (Age 65+) divided by working age population (Ages 16-64).
5 The average age of direct government employees was 43 in 2013.
6 The NIS has 579 employees in up to 20 locations across The Bahamas, and performs numerous functions, including
registration, collection of contributions, and the administration of various benefits. It will begin registration of
beneficiaries under the soon-to-be launched government’s National Health Insurance.
7 Nassar, K., Okwuokei, J., Li, M., Robinson T., and Thomas, S. (2016): “National Insurance Scheme Reforms in the
Caribbean”, Forthcoming IMF working paper.
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
2010 2015 2020 2025 2030 2035 2040 2045 2055 2065 2075
0-15 16-64 65+
Demographic Profile by Age Groups
(Thousands of persons)
Source: NIS 9th Acuturial Review; IMF Staff estimates
THE BAHAMAS
INTERNATIONAL MONETARY FUND 45
Table A2.1. The Bahamas: Options for Reform
Central Government Public Entities National Insurance Scheme
A. Parametric
Reforms
Extend the retirement age
from 65 to 67 percent.
Cap salary increases that are
pensionable.
Freeze pension benefits in
nominal terms for a number
of years.
Adjust the benefit structure,
eligibility rules and
replacement rates.
Index benefits to the CPI to
avoid discretionary upward
adjustment in benefits.
Gradually extend the
retirement age from
60 to 67 percent.
Cap salary increases
that are pensionable.
Increase the
contribution rate as
applicable.
Freeze pension
benefits in nominal
terms for a number of
years.
Adjust the benefit
structure, eligibility
rules and replacement
rates.
Modify indexation
provisions, or index to
the CPI.
Extend the retirement
age from 65 to 67
percent.
Increase the
contribution rate.
Freeze pension
benefits in nominal
terms for a number of
years.
Adjust the benefit
structure, eligibility
rules and replacement
rates.
B. Structural
Reforms
Introduce a defined
contribution system starting
with new employees.
Gradually shift to a fully
funded defined contribution
system.
Introduce a defined
contribution benefit
system starting with
new employees.
Gradually shift to a
fully funded defined
contribution system.
Introduce a defined
contribution starting
with new entrants.
Gradually shift to a
fully funded defined
contribution system.
C. Other
Measures
Continue fiscal consolidation.
Implement policies to alter
the demographic profile.
Introduce national pension
legislation.
Reform loss-making
entities.
Strengthen oversight
of public entities,
including through
regular financial
reporting.
Streamline the role of
NIS
Reduce administrative
cost.
Expand the coverage,
including to the self
employed.
Enforce stronger
penalties for non
compliance with
contribution payment
Diversify investment
portfolio.
THE BAHAMAS
46 INTERNATIONAL MONETARY FUND
Annex III. External Sector Assessment
The Bahamas external accounts are characterized by persistent current account deficits that are mostly
financed by FDI and other private inflows, and in recent years, by public borrowing. While the
estimates point to significant uncertainty in assessing the external position, overall, they suggest that
the external position is weaker than suggested by fundamentals and desirable policy settings. While
the CFM regime in place substantially reduces risks, the country would benefit from additional reserves
accumulation, given its exposure to external shocks and natural disasters, and increased reliance on
more volatile non-FDI capital flows in recent years. With the well-established currency peg, efforts to
improve competitiveness through structural reforms, accompanied by fiscal consolidation are needed
to address these vulnerabilities.
A. Exchange Rate Assessment
1. Model-based estimates. Model-based estimates point to an external position that is
weaker than suggested by fundamentals and desirable policy settings. Uncertainty across the
estimates is substantial, as reflected in the range of estimates from 10.7 to 31.3 percent.
2. EBA-lite results. Both the EBA-lite CA and REER approaches point to an overvalued REER in
2015 (see Table).1 The EBA-lite REER regression approach, which has a better fit than the CA
regression approach, suggests that the real rate is 10.7 percent stronger than the level consistent
with fundamentals and desired policies. The assessment using the CA regression approach is based
on an adjusted CA deficit to account for country-specific circumstances and additional temporary
factors. Specifically, the 2015 CA deficit is driven in part by sizeable, but one-off, imports related to
construction of the Baha Mar resort (which was halted in the first half of the year) and a significant
share of other imports that are funded by stable FDI related inflows. Adjusting for these factors, as
well as potential tourism revenue from Baha Mar opening (together estimated at around 7.1 percent
of GDP) reduces the estimated cyclically adjusted CA deficit to 8.2 percent of GDP. The CA approach
norm is estimated at -1.2 percent of GDP, therefore pointing to a sizeable REER gap of 31.3 percent.
In this context, the limitations of the approach are also reflected in a persistently poor fit of the
panel CA estimation for small, tourism-
based countries such as The Bahamas. In
addition, the reliability of the assessment
is affected by data shortcomings (such as
very large net errors and omissions in
last three years, and in particular in
2015).
1 The external sustainability approach is not used owing to lack of official net international investment position data.
The EBA-lite CA approach uses an estimate of the NFA position derived from incomplete data available in updated
and extended version of the Lane and Milesi-Ferretti (2007) dataset: “External Wealth of Nations”. Given the small
elasticity for NFA in the CA regression results are not sensitive to alternative estimates.
REER Approach MB Approach
Adjusted
Actual CA -8.2% -7.0%
Cyclically adjusted CA -8.5%
CA norm -1.2% -2.0%
Cyclically adjusted CA norm -1.5%
CA gap -7.0% -5.0%
o/w Policy gap -0.6%
REER gap 31.3% 10.7% 16.6%
Exchange Rate Assessment
CA Approach
EBA-lite methodology
THE BAHAMAS
INTERNATIONAL MONETARY FUND 47
3. Macroeconomic Balance (MB) approach. Given the large range of estimates from the EBA-
lite methods and apparent methodological weaknesses (in particular as regards the use of the CA
regression approach), we also employ an additional regression based MB approach to assess
external sustainability. As opposed to the EBA-lite CA regression approach, the MB approach
appropriately accounts for the fact that the CA deficit is expected to narrow significantly over the
medium term, reflecting both low oil prices and higher tourism revenue generated by Baha Mar
opening, therefore pointing to less REER misalignment (see Table). Analysis using this approach
suggests that the CA deficit is about 5 percentage points larger than the norm, implying a REER gap
of 16.6 percent.
4. REER has been appreciating. The REER has been appreciating since end 2014, at an
increased pace starting in March 2015, in line with the appreciation of the US dollar relative to other
currencies (see Figure). The pace of REER appreciation over the last year was comparable to several
other Caribbean countries (notable Barbados and the ECCU), but noticeably faster than in countries
with more flexible exchange rate arrangements (Jamaica and the Dominican Republic). The current
level of the REER is around 11 percent higher than
the long-term average. The REER appreciation
poses risks to the country’s competitiveness and
already weak external position. However, risks to
tourism competitiveness are mitigated somewhat
by the large share of US tourists in total arrivals. To
illustrate, the REER based on tourism weights only
has been more stable in recent years and has also
appreciated much less over the past year.
5. Other indicators. Estimates of the “Week at the Beach” index indicate that the nominal
costs of an average one week beach holiday in The Bahamas are already among the highest in the
world.2 Although the country remains an attractive high end tourism destination, its share in the
Caribbean tourism market that focuses on more exclusive tourism experience has been declining.
The World Bank’s Doing Business Index places The Bahamas well behind the regional; average, at
106th place among 148 countries. While the country marginally improved its rating since last year,
the overall position has significantly deteriorated over last seven years, further increasing the
economy’s distance to frontiers and best performers. A closer look at Doing Business sub-indicators
suggests that The Bahamas performs particularly poorly in registering property, getting credit,
starting a business, and protecting minority investors.
B. Reserve Adequacy
6. Overall assessment. Reserves appear to be adequate according to several metrics, but low
when taking into account small island specific factors, such as exposure to external shocks and
natural disasters. Strengthening external accounts through structural reforms that will improve
2 N. Laframboise, N. Mwase, J. Park, and Y. Zhou (2014): “Revisiting Tourism Flows to the Caribbean: What is Driving
Arrivals”, IMF Working Paper 14/228.
80
90
100
110
120
130
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
REER of Tourism-Dependent Peers
(Index 2010=100)
The Bahamas Jamaica
Barbados ECCU
Dominican Republic
Sources: INS; and Fund staff calculations.
THE BAHAMAS
48 INTERNATIONAL MONETARY FUND
business climate and competitiveness, together with continued fiscal consolidation, should therefore
be a priority.
7. Reserve adequacy metrics. International reserves stood at US$981 million at end-March
2015 and are below traditional international benchmarks of 3 months of next year’s goods and
services imports and 20 percent of broad money. However, adjusting for FDI-related imports,
reserves are more than 3 months of imports. They are also well above 100 percent of short term
debt. The Fund’s standard risk-weighted measure, which attempts to measure the benefit of
reserves in avoiding crises and in reducing their severity, requires coverage against medium and
long-term external liabilities, in addition to coverage of short-term debt and broad money. The
results indicate that current reserves are at around 72 percent of the suggested level. However, the
existence of capital controls both on residents, and certain types on nonresident outflows, continues
to be an important mitigating factor.3 Accounting for these county-specific factors, the revised risk-
weighted measure shows that reserves appear to be adequate. Still, the country has been increasing
its reliance on private capital inflows other than stable FDI inflows, and on sovereign bond issuance,
suggesting increasing risks from shifts in investor sentiment. The framework proposed by Mwase
(2012) further takes into account specifics of small island states and their exposure to natural
disasters.4 In the case of The Bahamas, this measure (SIDS) indicates that reserves are only at 45
percent of the recommended level.
3 With the exception of 2009, when they briefly fell to zero, net portfolio investment and other private capital flows
have always been positive, thus supporting reserves. All outward capital transfers require Exchange Control approval,
and outflows on resident-owned capital are restricted. In principle, inward investment in shares and other securities
by nonresident is unrestricted. However, the Central Bank approval is required for the sale and issuance of capital
and money market instruments on nonresidents locally.
4 Mwase, N. (2012): “How Much Should I Hold? Reserve Adequacy in Emerging Markets and Small Islands”, IMF
Working Paper 12/205
0
500
1,000
1,500
2,000
2,500
2004 2006 2008 2010 2012 2014 2016 2018 2020
International Reserves (US$ millions)
3 Months (next year's) Imports
3 months (next year's) Non-FDI related Imports
20% of Broad Money (M2)
100% of Central Bank's Demand Liabilities
Short Term Debt
Sources: The Bahamian authorities; and Fund staff estimates.
0
500
1,000
1,500
2,000
2,500
2004 2006 2008 2010 2012 2014 2016 2018 2020
International Reserves (US$ millions)
Risk-Weighted Measure
SIDS Measure
Revised Risk-Weighted Measure
Sources: The Bahamian authorities; and Fund staff estimates.
International Reserves
THE BAHAMAS STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—
INFORMATIONAL ANNEX
Prepared By
Western Hemisphere Department
(In consultation with other departments)
FUND RELATIONS ______________________________________________________________________ 2
FINANCIAL RELATIONS WITH THE INTER-AMERICAN DEVELOPMENT BANK ______ 4
FINANCIAL RELATIONS WITH THE CARIBBEAN DEVELOPMENT BANK _____________ 7
STATISTICAL ISSUES ___________________________________________________________________ 8
CONTENTS
May 16, 2016
THE BAHAMAS
2 INTERNATIONAL MONETARY FUND
FUND RELATIONS
(As of March 31, 2016)
Membership Status: Joined August 21, 1973; Article VIII
General Resources Account:
SDR Millions Percent of Quota
Quota 182.40 100.00
Fund holdings of currency 163.12 89.43
Reserve position in the Fund 19.29 10.57
SDR Department:
SDR Millions Percent of Quota
Net cumulative allocation 124.41 100.00
Holdings 54.15 43.50
Outstanding Purchases and Loans: None
Latest Financial Arrangements: None
Projected Payments to the Fund:
(SDR Million; based on existing use of resources and present holdings of SDRs):
Forthcoming
2016 2017 2018 2019 2020
Principal
Charges/
Interest 0.03 0.04 0.04 0.04 0.04
Total 0.03 0.04 0.04 0.04 0.04
Exchange Rate Arrangement
The Bahamas has a conventional fixed peg arrangement, with the Bahamian dollar pegged to
the U.S. dollar at B$1 per US$1. The Bahamas has accepted the obligations of Article VIII, Sections
2, 3, and 4 of the Articles of Agreement and maintains an exchange system that is free of restrictions
on the making of payments and transfers for current international transactions. There have been no
changes in exchange restrictions since the last Article IV consultation.
THE BAHAMAS
INTERNATIONAL MONETARY FUND 3
Assessment of Data Adequacy for Surveillance:
Data provision is broadly adequate for surveillance. In particular, all critical macroeconomic data,
including comprehensive central government finance statistics, are regularly published in the Central
Bank of the Bahamas’ “Monthly Economic and Financial Developments” and “Quarterly Statistical
Digest”. However, the authorities have yet to develop the institutional capacity for the compilation of
international investment position (IIP) statistics and general government accounts data. Also, The
Bahamas has still not started compiling balance of payments statistics consistent with the Balance of
Payments Manual 6. Staff continues to support the authorities’ efforts towards addressing data gaps,
including continuing technical assistance to compile and publish quarterly national accounts and IIP
statistics.
Last Article IV Consultation
The Bahamas is on a 12-month consultation cycle. The last Article IV consultation was concluded by
the Executive Board on June 8, 2015 (IMF Country Report No. 15/75).
Technical Assistance
Department Dates Purpose
CARTAC January 2011 CPI Revision
CARTAC April 2011 Revenue Mod./Forecasting
CARTAC May 2011 PFM Reform Action Plan
STA October 2011 Government Finance Statistics
LEG February 2012 Central Bank of The Bahamas Act
MCM February/March 2012 Public Debt Management
STA June 2012 Quarterly National Accounts
LEG July 2012 Payment System Laws
STA Jan 2013 Government Finance Statistics
MCM February 2013 Financial Stability Reporting
FAD April 2013 Tax Reforms for Increased Buoyancy
CARTAC April 2013 Draft VAT Bill
MCM May 2013 Basel II Implementation
CARTAC May/September 2013 Central Revenue Agency
CARTAC July 2013 Support for Customs and Excise
Department’s Preparation of VAT
FAD January/February 2014 Revenue Administration
FAD March 2014
Tax Administration Readiness to
Successfully Launch and Administer VAT
FAD March 2014 Goods and Services Tax
FAD March 2014 VAT Revenue Projection
THE BAHAMAS
4 INTERNATIONAL MONETARY FUND
Technical Assistance (Concluded)
FAD April 2014 Revenue Impact of Implementing VAT
MCM March 2014 Financial Crisis Management Planning
MCM April 2014 Debt Management
CARTAC June 2014 Price Statistics
CARTAC
August 2014
Balance of Payment and International
Investment Position
FAD
September/October
2014
Revenue Administration
FAD October 2014 Preparation To Launch a Value Added Tax
CARTAC November 2014 Quarterly National Accounts
CARTAC December 2014 Price Statistics
CARTAC December 2014 Risk-Based Supervision of the Securities
Market
LEG
March 2015
Strengthening The Legal Framework for
Bank Resolution and Crisis Management
CARTAC August/September 2015 Quarterly National Accounts
FAD February/March 2016 Assessment of VAT Launch and
Administration
Resident Representative: None
FINANCIAL RELATIONS WITH THE INTER-AMERICAN
DEVELOPMENT BANK
(As of March, 2016)
Country Strategy with The Bahamas 2013–2017
The current Country Strategy supports the Government of The Bahamas (GoBH) efforts to
ensure macroeconomic sustainability, social stability and employment, while focusing on
resilience to mitigate the negative impact of natural disasters and climate change. The Bank is:
(i) supporting the implementation of fiscal and debt sustainability reforms with an impact on public
finances and public financial management; (ii) assisting with fostering social cohesion, with an
emphasis on preventing crime and violence and strengthening the criminal justice system; (iii)
assisting with modernizing the electricity sector and diversification of the energy matrix; (iv)
facilitating diversification of both the economy and trading partners by enhancing areas of
comparative advantage and removing constraints to private sector activity; and (v) building
resilience to natural disasters through improved coastal zone management, incorporating disaster
risk reduction and climate change adaptation measures in development planning, control and
THE BAHAMAS
INTERNATIONAL MONETARY FUND 5
monitoring. The support is focused on the following priority areas: (1) Public Finances and
Management; (2) Citizen Security and Justice; (3) Energy; (4) Private Sector Development; and
(5) Coastal Risk Management and Climate Change Adaptation. Interventions will contribute to
stemming the erosion of per capita incomes by protecting public investment and promoting growth.
Efforts are made to generate non-sovereign guaranteed (NSG) lending that is closely aligned to the
development and diversification of the private sector, as well as direct financing for alternative
energy and energy efficiency. In addition, the IDB aims to support interventions in sectors where
additional financial and non-financial resources may be leveraged.
Other areas for future dialogue. In addition to the priority areas identified above, the Bank is
supporting diagnostic and analytical work in the following dialogue areas: (a) Education: The
provision of quality education services: (i) via strengthening capacity at the secondary education
level to improve the transition from school to work, including potential areas for PPPs, and (ii) for
special needs children and youth at all levels of the educational system and with an emphasis on the
transition from school to work; (b) Food Security: Analyzing options to increase domestic food
production and consumption of local goods, given the country’s heavy dependence on food
imports; (c) Transport: An analysis of (i) the impact and opportunities from the completion of the
Panama Canal, (ii) greater connectivity: how inter-island mobility could be made more efficient
across the 28 inhabited islands; (iii) enhancing trade links with the rest of the Caribbean and Latin
America; and (d) Informal Immigration.
THE BAHAMAS
6 INTERNATIONAL MONETARY FUND
Active Loans as of March 31, 2016
(In millions of U.S. dollars)
Project Name Approval Date Approved Disbursed Available
BH-L1027 Air Transport Reform Program (PBL) Dec 14, 2011 47.5 15.0 32.5
BH-L1027 Air Transport Reform Program (TC
Loan) Dec 14, 2011 2.5 2.4 0.1
BH-L1028
WSC Support Program––New
Providence Water Supply and
Sanitation Systems Upgrade
Nov 16, 2011 81.0 56.2 24.8
BH-L1016 Trade Sector Support Program Jul 18, 2012 16.5 4.2 12.3
BH-L1029 New Providence Transport Program
Supplementary Financing II Sep 04, 2012 65.0 59.5 5.5
BH-L1030 Social Safety Net Reform Program Jul 18, 2012 7.5 1.6 5.9
BH-L1033 Citizen Security and Justice Program Jul 7, 2015 20.0 0.0 20.0
BH-L1035 Performance Monitoring and Public
Financial Management Reform Nov 19, 2014 33.0 0.0 33.0
Total 273.0 138.9 134.1
Net Flow of IADB Convertible Currencies
(In millions of U.S. dollars)
Net Flow of IADB Convertible Currencies
(US$ million)
2010 2011 2012 2013 2014 2015 2016 (P)
a. Loan Disbursements 32.8 57 61.9 49.4 30.4 11.0 17.2
…PBL disbursements 0 15 0 0 0 0 0
b. Repayments principal 8.6 9.4 11.7 14.1 14.2 16.6 16.5
c. Net Loan Flow (a–b)
24.2 47.6 50.2
35.3
16.2
-5.6
0.7
d. Subscriptions &
Contributions
0.3 0.3 0.
9
1 0.8 0.0 0.5
e. Interests & Charges 5.6 5.7 6.4 6.8 6.8 6.6 6.9
f. Net Cash Flow
(c–d–e) 18.3 41.6 42.9
27.5
8.7
-12.2
-6.7
(p) Projected.
THE BAHAMAS
INTERNATIONAL MONETARY FUND 7
FINANCIAL RELATIONS WITH THE CARIBBEAN
DEVELOPMENT BANK
(As of April, 2016)
Country Strategy with The Bahamas 2013─2017
The overriding aim of the CDB’s current Strategy for The Bahamas is to support the country’s
advancement as a progressively stable and vibrant economy, as well as an increasingly safe society
with enhanced opportunities for productive employment and improved living standards. An
indicative programme of assistance was proposed to help the country achieve faster, more inclusive
and environmentally sustainable development, buttressed by macroeconomic stability and citizen
security. The Country Strategy responds to The Bahamas’ development priorities and is aligned with
the Bank’s strategic objectives of fostering inclusive social development and promoting broad-
based economic growth, as well as environmental sustainability. The Bank is supporting six
development priorities: (i) improved access to, and quality of climate-resilient social and economic
infrastructure; (ii) enhanced access to quality, and demand-driven post-secondary and tertiary
education; (iii) increased social inclusion and citizen security; (iv) strengthened productive and
managerial capacities of micro, small and medium-sized enterprises; (v) improved public finances
and planning; and (vi) strengthened resilience to climate change and improved disaster risk
management (DRM). A number of projects, along with associated technical assistance, are being
taken forward to address these priorities.
Other areas for future dialogue: The Bank has already conducted a mid-term review of the
existing strategy, with a view to shaping the rest of the strategy period, and thinking about the next,
which is due to start in 2018. Discussions are likely to focus on consolidating the work of the
existing strategy, with particular focus on the development needs in the Family Islands.
THE BAHAMAS
8 INTERNATIONAL MONETARY FUND
Loans as of April 14, 2016
(In millions of U.S. dollars)
Project Name Approval
Date Approved Disbursed Available
Active Loans
9/OR-
BHA
Family Islands Transport Sector
Enhancement Project
Mar 11,
2010 10.1 6.3 3.8
10-
OR/BHA
College of The Bahamas
Transformation Project
Mar 13,
2014 16.2 0 16.2
Active Loans 2 26.3 6.3 20.0
Pending Loans
Technical and Vocational
Institute Enhancement Project
Dec 11,
2014 4.7 0 4.7
Water Supply Improvement
Project
Dec 10,
2015 28.3 0 28.3
Pending Loans 2 33.0 0 33.0
Total Loans 4 59.3 6.3 53.0
STATISTICAL ISSUES
Statistical data are broadly adequate for surveillance purposes, but some weaknesses remain
in both coverage and timeliness, partly reflecting capacity constraints. The central bank
produces annual, quarterly, and monthly reports on macroeconomic developments, and monetary
and fiscal data, and is the main source of economic information. The operations of public
Net Flow of CDB Convertible Currencies
(In millions of U.S. dollars)
2009 2010 2011 2012 2013 2014 2015
a. Loan Disbursements 0 0 0.06 5.06 0.72 1.15 0.11
…PBL disbursements 0 0 0 0 0 0 0
b. Repayments principal 0.68 0.90 0.90 0.69 0.48 0.80 0.02
c. Net Loan Flow
(a–b) -0.68 -0.90 -0.85 4.37
0.24
0.35
0.08
d. Subscriptions
& Contributions
1.47 1.47 3.36 3.36 3.36 3.36 3.36
e. Interests & Charges 0.16 0.15 0.17 0.19 0.28 0.89 0.39
f. Net Cash Flow
(c–d–e) -2.31 -2.52 -4.39 0.82
-3.40
-3.90
-3.67
THE BAHAMAS
INTERNATIONAL MONETARY FUND 9
corporations are not compiled into a consolidated set of public sector accounts, although their debt
is included in the public debt data. Thus, a presentation of the general government accounts,
including revenue, expenditure, and overall balance is not available.
In March 2015, the Department of Statistics (DoS) updated the CPI methodology with technical
assistance from CARTAC. Using the results of the 2013 Household Expenditure Survey, it revised the
CPI weights to 2013 from 2006 and changed the base period to November 2014 from February 2010.
The coverage was expanded to include new local and foreign items reflecting current expenditures
by households. New sample outlets were also introduced to reflect those that are frequently visited
by Households.
The DoS continues to develop the Export-Import Price Indices (XMPIs) to meet international
standards. CARTAC missions have assisted in compiling the XMPIs, including Tourism Services Price
Index (TSPI) on quarterly basis. New XMPIs for goods and major services have been developed,
while procedures for systematic re-sampling and re-weighting were modified in order to keep the
market basket representative of what is being measured. The DoS is also receiving technical
assistance from CARTAC to produce quarterly GDP estimates, and they are expecting to start
publishing quarterly data in October 2016. The Bahamas does not prepare data covering the
economy-wide external debt position, nor an international investment position (IIP), although they
have stated their intention to do so. In August 2014, a CARTAC mission advised the authorities on
the requirements for transitioning to Balance of Payments Manual 6 (BMP6) and disseminating
statistics on the IIP. The mission noted that most of the conversion from BPM5 to BPM6 is
straightforward and some of the data required, such as reserve assets and public sector debt, are
already available. However, the authorities will need to collect new data on the nonbank private
sector. Capacity constraints at the Central Bank have led to little progress in this project. The
authorities plan to start publishing BPM6 statistics in September 2016 and IIP statistics in
March 2017.
The Inter-American Development Bank (IDB), with the technical support of the United States Census
Bureau (USCB), has promoted the development of a methodology called “Tool for Assessing
Statistical Capacity” (TASC). This is a self-assessment instrument, the general purpose of which is
measuring and evaluating the statistical capacity of a country’s National Statistical System (NSS),
and more specifically, the operational capacity of its National Statistical Office (NSO), to produce
and disseminate basic statistics drawn from censuses, surveys and administrative records. There was
a mission to The Bahamas to meet with the Department of Statistics and other agencies that
produce statistics to apply the TASC in late November, 2013. As part of the statistical component of
the IDB’s Public Financial Management reform program (PFM) with the government, the TASC
assessment will be applied again to assess how things have evolved since 2013.
The Bahamas began participating in the General Data Dissemination System (GDDS) in 2003. Its
metadata were posted on the Fund’s Dissemination Standards Bulletin Board on February 14, 2003.
THE BAHAMAS
10 INTERNATIONAL MONETARY FUND
The Bahamas: Table of Common Indicators Required for Surveillance
(As of April 20, 2016)
Date of Latest
Observation
(mm/yy)
Date
Received
Frequency
of Data7
Frequency of
Reporting7
Frequency
of
Publication7
Exchange Rates Fixed
International Reserve Assets and
Reserve Liabilities of the Monetary
Authorities1
3/16 04/16 M M M
Reserve/Base Money 2/16 04/16 M M M
Broad Money 2/16 04/16 M M M
Central Bank Balance Sheet 2/16 04/16 M M M
Consolidated Balance Sheet of the
Banking System 12/15 04/16 M M Q
Interest Rates2 3/16 04/16 M M M
Consumer Price Index 12/15 03/18 M M M
Revenue, Expenditure, Balance and
Composition of Financing3––General
Government4
NA NA NA NA NA
Revenue, Expenditure, Balance and
Composition of Financing3––Central
Government
12/15 02/16 Q Q Q
Stocks of Central Government and
Central Government-Guaranteed
Debt5
12/15 02/16 Q Q Q
External Current Account Balance 12/15 4/16 Q Q Q
Exports and Imports of Goods and
Services 12/15 4/16 Q Q Q
GDP/GNP 2014 03/15 A A A
Gross External Debt 12/15 02/16 Q Q Q
International Investment Position6 NA NA NA NA NA 1 Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise
short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to
pay and to receive foreign currency, including those linked to a foreign currency but settled by other means. 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and
bonds. 3 Foreign, domestic bank, and domestic nonbank financing. 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds)
and state and local governments. 5 Including currency and maturity composition. 6 Includes external gross financial asset and liability positions vis-à-vis nonresidents. 7 Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).
Statement by the Staff Representative on The Bahamas
June 8, 2016
1. This statement provides new information that has become available since the
issuance of the staff report (SM/16/110). The additional information does not change the
thrust of the staff appraisal.
2. Budget communication. Prime Minister Christie presented the 2016/17 fiscal year
budget to Parliament on May 25. For the current 2015/16 fiscal year (ending this June), the
government expects the fiscal deficit at B$150 million, broadly consistent with the earlier
budget projection (at B$141 million, about 1.5 percent of GDP). Compared to the budget
projection, the somewhat larger deficit reflects lower revenue (despite strong VAT
performance), higher current spending (including additional tourism concession payments),
and lower capital spending. The government’s fiscal deficit estimate remains lower than
staff’s expectation primarily owing to more optimistic revenue projections and lower than
budgeted capital expenditure.
3. The 2016/17 budget. The budget proposes further deficit reduction next year (to
$100million, or about 1.1 percent of GDP) that is expected to arrest the recent increase in
public debt. At this pace, the authorities’ project the central government debt-to-GDP ratio to
fall below 60 percent by 2018/19. The budget proposes “relief to consumers and businesses”
through reductions in customs duties and tax concessions, as well as continued measures to
modernize tax administration. The budget communication also outlines several new policy
initiatives, including a training program for the unemployed; a mortgage relief program; and
support for the loss-making Bank of The Bahamas, in line with the priorities identified in the
staff report. As a part of the budget communication, the government also announced a
framework agreement to finance and complete construction of the Baha Mar resort.
Statement by Michael McGrath, Alternate Executive Director for The Bahamas
and Rebekah Young, Senior Advisor
June 8, 2016
The Bahamian authorities continue to value greatly the policy dialogue with the Fund. They
welcome the thorough assessment of the country’s economic situation and financial system
made by the Article IV mission and broadly agree with this assessment. The report outlines a
sensible set of policy options, for the most part in line with initiatives already in train or
envisioned by our authorities.
The Outlook
Economic conditions in The Bahamas remain subdued. Preliminary estimates for 2015
suggest a contraction of 1.7 percent of GDP. The modest growth in tourism was offset by a
contraction in domestic demand and weak goods exports, fueled by headwinds from fiscal
consolidation, introduction of the VAT, and the wind-up of construction activities related to
the Baha Mar.
Growth is expected to pick up modestly in 2016 by around 0.5 percent of GDP, driven by
modest growth in the tourism sector and foreign investment related to the construction sector.
Economic activity thereafter is projected to strengthen further in 2017 to an annual rate of 1
percent in real terms.
A number of new investment projects coming on stream in the near term have the potential to
boost growth, lower unemployment, and enhance competitiveness. Notably, our authorities
are confident that the Baha Mar resort, which is 97 percent complete, will open shortly. This
new, high-end resort is expected to add 2,200 rooms to the country’s stock of over 14,000.
Additionally, a relatively strong level of foreign investment projects in both New Providence
and across the archipelago should sustain aggregate demand in the short run, boost the
tourism productive capacity, and lead to a much-needed increase in economic activity and
employment creation once these projects come fully on stream.
As growth solidifies, the unemployment rate should gradually decline from its current level
of 14.8 percent (November). By itself, the Baha Mar project should employ at steady state
more than 5,000 employees. This is expected to reduce significantly the unemployment rate,
increase disposable income, and support domestic demand.
While our authorities broadly agree with the medium-term outlook and risk profile, they are
cautiously optimistic on the upside potential. For example, while our authorities
acknowledge that a further surge in the U.S. dollar could weaken cost competitiveness of The
Bahamas, the country stands to gain from increased trade and tourism with the U.S., provided
the surge is underpinned by improving U.S. economic prospects. Cuba is not perceived as a
significant competitor in the medium term, particularly given The Bahamas’ high-end target
market, rather it could yield synergies through enhanced collaboration in the region. Our
2
authorities also view persistently low oil prices as an upside risk as it would reduce the value
of imports and could help smooth the transition of the energy sector reforms.
Ensuring Fiscal Sustainability
The Bahamian authorities recognize the importance of responsible fiscal policy to
maintaining macroeconomic stability and policy credibility. They reaffirm their commitment
to firmly staying the course with their Medium-Term Fiscal Consolidation Plan, including
through continued fiscal consolidation to place public debt on a declining path and rebuild
buffers. They are on target to meet their 2015/16 fiscal deficit target of 1.5 percent, with a
further reduction in 2016/17 to 1.1 percent, as announced in the recent the 2016/17 Budget
Communication on May 25th. They expect to eliminate the deficit and to achieve a small
balance by 2018/19. The central government debt to GDP ratio is expected to stabilize at 67
percent of GDP by 2016/17 and begin to decline thereafter to about 59 percent in 2018/19.
This will be achieved by continued restraint of public expenditures, enhanced revenue
administration, and securing new sources of revenue, as well as continued efforts to stimulate
overall economic growth.
Our authorities have demonstrated credible progress towards consolidation. The successful
introduction of the VAT in 2015 was a significant achievement and will contribute to the
long-term macroeconomic stability of the country. Revenue collection exceeded expectations
and, taken together with other reforms, should raise additional revenues of 2.5 percent of
GDP, bringing the total revenue yield to a respectable 22.5 percent of GDP this year. Our
authorities are intent on protecting the integrity and efficiency of the VAT regime by
resisting pressures to introduce distortionary exemptions. They view targeted social spending
as a more effective means to assist low-income populations, and have already raised
minimum wage and increased social spending to this end.
Our authorities are continuing with revenue administration reforms that will yield significant
additional revenue. These include a number of targeted reforms, for example to customs,
business license and real property taxes, as well as modernization measures, including the
successful introduction of electronic filing of customs import declarations and online
payment of customs duties. These measures lower the cost and increase the ease of doing
business, while providing stronger controls over the collection of government revenue. The
modernization of the property tax management system is expected to be concluded over the
course of upcoming fiscal year. This a significant advance under the mandate of the
centralized revenue administration (Department of Inland Revenue). Our authorities are also
taking steps to modernize their public financial management system, including through
revamped accounting systems and other budget reforms.
Our authorities recognize the importance of expenditure reforms in fiscal consolidation. In
the recent Budget Communication, they project at least a 1 percent of GDP reduction in
recurrent expenditures per year beyond the coming fiscal year. They recognize this will take
discipline. For example, they will accommodate for fiscal costs related to Hurricane Joaquin
through spending reallocation, amounting to $100 million (1.1 percent of GDP) over several
years. They also recognize the need to be mindful of fiscal constraints in rolling out the
3
National Health Insurance, and they will soon commence public consultation on pension
reform, including on options to move to a defined contribution-based regime.
Maintaining External Sector Sustainability
Inflation has been tempered at 1.9 percent in 2015. While the introduction of the VAT
resulted in some temporary upward pressure, this has been moderated by low oil prices. This
is allowing monetary policy to remain supportive while maintaining the fixed exchange rate
which has been instrumental in reducing uncertainty for foreign investors and providing a
credible nominal anchor.
The current account deficit has come down modestly to 7 percent of GDP. The level of
reserves has increased to US$980.5 million at the end of March, up significantly by about
$172 million since December 2015. These levels remain adequate when measured in terms of
non-FDI imports and other standard metrics, and are expected to improve through growth in
tourism earnings and foreign direct investment, together with reforms that will facilitate
stable and organic accumulation of reserves.
Strengthening Financial Sector Resilience
The Bahamian banking system remains well capitalized, profitable, and liquid. Our
authorities have made steady progress in implementing financial sector reforms identified in
the 2013 FSAP, including further strengthening of the regulatory and supervisory framework,
reporting under the U.S. Foreign Accounts Tax Compliance Act (FATCA), and
implementation of the new Basel II/III regime. A consulting firm has also been engaged by a
state-owned bank to develop and implement a rehabilitation plan, which should improve
governance, revise its market focus, strengthen its risk management, and enforce collection.
Our authorities recognize the need for decisive and timely resolution of non-performing loans
(NPLs). They note that banks have been more aggressive in writing off and provisioning for
bad debts, as well as proactively implementing policies to provide relief or restructuring
options to distressed customers. Our authorities are also working with banks to develop a
new framework for mortgage relief that will impact significantly more homeowners than the
previous program without unduly burdening the budget or rewarding poor lending practices.
They expect to release details of this new Mortgage Relief Programme during the
forthcoming budget debates, through which an estimated 1,000 delinquent borrowers are
expected to initially qualify. Our authorities remain committed to addressing any remaining
gaps that will ensure financial stability.
De-Risking
Our authorities recognize the challenges stemming from global de-risking trends, which are
affecting a number of countries in the region, including The Bahamas. While affected
institutions have been able to avoid significant disruptions, our authorities are committed to
proactively addressing any concerns. They continue to monitor the industry, provide
assistance to banks, and are encouraging them to take a risk-based approach and to work on
4
any remaining regulatory gaps. Our authorities will also continue to coordinate with regional
counterparts to mitigate any adverse economic fallout. With a strong overall AML/CFT
regime in place, our authorities are seeking greater clarity on regulatory expectations and
requirements from international banks and from source jurisdictions. They are strongly
committed to promptly addressing gaps or concerns as they may arise.
Fostering Growth and Competitiveness
The Bahamian authorities are very mindful of the need to boost potential growth, enhance
productivity and bolster competitiveness. They afford high priority to the finalization of the
National Development Plan (NDP), which will help accelerate economic, institutional, and
social development over the medium and long term. The April ‘State of the Nation Report’
was an important milestone in the first phase of the NDP, providing an in-depth diagnostic of
The Bahamian economy and society. While extensive, non-partisan consultations on the
NDP have taken considerable time, this inclusive approach will be critical to gaining
consensus for implementation. A first draft of the NDP is expected to be released in the
coming months for further consultation.
Our authorities recognize the importance of improving the business environment to
strengthen competitiveness, including through reliable and affordable energy costs. This
would also help facilitate economic diversification. To this end, important steps have been
taken, including the introduction of legislation to reform the Bahamas Electricity Corporation
(BEC). Its management has recently been outsourced to a private sector company,
PowerSecure International (US), with a mandate to operate on a fully commercial basis,
which should bring down costs and resolve power supply problems to the benefit of tourism
and other sectors. It should also end uncertainties that have prevented long-term investment
needed to expand generation capacity, improve the distribution network, and reduce the cost
of power.
The authorities strongly agree with the need for continuous improvement of efficiency and
transparency of operations of other state-owned enterprises (SOEs), not only to minimize the
budget implications but to lower costs and improve services to customers. They expect to
achieve significant milestones in introducing competition in the cellular market in the coming
weeks. At the same time, they note the challenges associated with providing uniform and
affordable services to all islands in the archipelago, given the high cost and low scope for
economies of scale.
Our authorities remain committed to raising human capital through educational and
vocational reforms to lower unemployment and raise potential growth. Legislation has
recently been finalized for the establishment of the University of The Bahamas. This will
complement other recent secondary educational reforms, including strengthened standards
for school graduates and the introduction of STAR Academy targeting vulnerable children.
Significant efforts are underway to also strengthen work force training including through the
establishment of the National Training Agency. The government announced on May 25th, an
additional $22 million to complement last year’s $20 million in support of an apprenticeship
program in partnership with the private sector under which employers will be incentivized,
5
through a wage subsidy, to employ young persons in positions that will afford them the
opportunity to acquire basic job skills.